L-3 Communications Holdings Inc: $LLL Cash Flow Valuation Update

Current Price: ~ $106/share
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

* Free cash flow guidance remains $1,010,000,000 - Ralph G. D'Ambrosio, Chief Financial Officer and Senior Vice President; Q3 2013 earnings call transcript

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

• 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

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,

• 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

Morningstar.com

Yahoo! Finance

L-3 Communications Holdings Inc

Disclosure: I have no real positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

L-3 Communications Holdings Inc: $LLL Cash Flow Valuation Update

Current Price: ~ $71/share
Projected Yield: ~ 2.83%



L-3 Communications is a leading provider of high-technology products, systems, and subsystems in the defense electronics business. Customers include the United States Department of Defense (75% of 2011 sales), other U.S. governmental agencies (7%), foreign governments (8%), and commercial customers (6% foreign and 4% domestic). Areas of focus include intelligence, aircraft modernization, training, communication systems, and specialized products such as bomb-detection equipment.           

Estimated WACC for the firm today is 9.05% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2002	256
2003	373
2004	540
2005	727
2006	918
2007	1113
2008	1169
2009	1221
2010	1280
2011	1292

Average Annual Growth FCF: ~ 21%

CAGR FCF: ~ 20%

Consensus Forecast Industry 5-Year Growth: ~ 13% per year

Consensus Forecast Company 5-Year Growth: ~ 3% per year

Internal Growth Rate: ~ 5%

Sustainable Growth Rate: ~ 13%

Scenario 1
Average FCF (2011, 2010, 2009) is $1264 million

• Start at $1264 million FCF
• Assume a 5-year growth rate in FCF of 3% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1264
1	1302
2	1341
3	1381
4	1423
5	1465
Terminal Value	16676

The firm's future cash flows, discounted at a WACC of 9.05%, give a present value for the entire firm (Debt + Equity) of $16156 million. If the firm's fair value of debt is estimated at $4125 million, then the fair value of the firm's equity could be $12031 million.  $12031 million / 99 million outstanding shares is approximately $122 per share and a 20% margin of safety is $98/share.

Scenario 2
All else being equal,

• Discount the firm's future FCFs at 13.00%

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1264
1	1302
2	1341
3	1381
4	1423
5	1465
Terminal Value	11610

• Present Value of the entire firm (Debt + Equity): $11129 million
• Value of Equity: $7004 million or $71/share
• 20% margin of safety is $57/share

Sources

Morningstar.com

Yahoo! Finance

L-3Com.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

L-3 Communications Holdings Inc: $LLL valuation update

L-3 Communications Holdings, Inc ($LLL) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation posted January 20.  This update incorporates the firm's year-end 2010 data.  I believe $LLL is undervalued at $81/share and fairly valued at $102/share on a cash flow valuation basis.    


L-3 Communications is a leading provider of high-technology products, systems, and subsystems in the defense electronics business. The company sells products to the United States Department of Defense (76% of 2009 sales) as well as other U.S. and foreign governmental agencies and commercial customers. Areas of focus include intelligence, aircraft modernization, simulation and training, communication systems, and specialized products such as bomb-detection equipment.

I estimated the firm's WACC today at 9.69% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2000	80
2001	125
2002	256
2003	373
2004	540
2005	727
2006	918
2007	1113
2008	1169
2009	1221
2010	1280

Internal Growth Rate: approx 5%

Sustainable Growth Rate: approx 13%

Average Annual Growth FCF: approx 35%

CAGR FCF: approx. 32%

Consensus Forecast Industry 5-Year Growth: approx 18% per year
Consensus Forecast Company 5-Year Growth: approx 8% per year

Assuming the company achieves a 5-year growth rate in FCF of 3% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $ Millions
0	1280
1	1318
2	1358
3	1399
4	1441
5	1484
Terminal Value	15780

The firm's future cash flows, discounted at a WACC of 9.69%, give a present value for the entire firm (Debt + Equity) of $15,260 million. If the firm's fair value of debt is estimated at $4202 million, then the fair value of the firm's equity could be $11,058 million.  $11,058 million / 108 million outstanding shares is approximately $102 per share and a 20% margin of safety is $82/share.

Sources

Morningstar.com

L-3 Com.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.