Yield: ~ 2.09%
L-3 Communications Holdings, Inc is engaged as a system contractor in aircraft modernization & maintenance, Command, Control, Communications, Intelligence, Surveillance and Reconnaissance systems, and government services.
Estimated WACC for the firm today is 9.72% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
|
Year
|
FCF $Millions
|
|
2003
|
373
|
|
2004
|
540
|
|
2005
|
727
|
|
2006
|
918
|
|
2007
|
1113
|
|
2008
|
1169
|
|
2009
|
1221
|
|
2010
|
1280
|
|
2011
|
1292
|
|
2012
|
1096
|
|
2013 guidance*
|
1010
|
Average Annual Growth FCF: ~ 14.11%
CAGR FCF: ~ 12.72%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year
Consensus Forecast Company 5-Year Growth: ~ 2% per year
Internal Growth Rate: ~ 4%
Sustainable Growth Rate: ~ 11%
Scenario 1
Average FCF (2013* - 2011) is $1133 million
Average FCF (2013* - 2011) is $1133 million
- Start at $1133 million FCF
- Assume a 5-year growth rate in FCF of 2% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future free cash flows, discounted at a WACC of 9.72%, give a present value for the entire firm (Debt + Equity) of $12833 million. If the firm's fair value of debt is estimated at $3883 million, then the fair value of the firm's equity could be $8950 million. $8950 million / 89 million outstanding shares is approximately $101 per share and a 20% margin of safety is $81/share.
|
Year
|
FCF $Millions
|
|
0
|
1133
|
|
1
|
1156
|
|
2
|
1179
|
|
3
|
1202
|
|
4
|
1226
|
|
5
|
1251
|
|
Terminal Value
|
13129
|
The firm's future free cash flows, discounted at a WACC of 9.72%, give a present value for the entire firm (Debt + Equity) of $12833 million. If the firm's fair value of debt is estimated at $3883 million, then the fair value of the firm's equity could be $8950 million. $8950 million / 89 million outstanding shares is approximately $101 per share and a 20% margin of safety is $81/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 6.25% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
|
Year
|
FCF $Millions
|
|
0
|
1133
|
|
1
|
1204
|
|
2
|
1279
|
|
3
|
1359
|
|
4
|
1444
|
|
5
|
1534
|
|
Terminal Value
|
16773
|
- Present Value of the entire firm (Debt + Equity): $15699 million
- Value of Equity: $11816 million or $133/share
- 20% margin of safety is $106/share
Conclusion: Closing out position in LLL for my Fantasy Portfolio today; looking for better value
Sources
Disclosure: I have no real positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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