Yield: ~ 2.56%

Johnson & Johnson is a holding company, which is engaged in the research and development, manufacture and sale of a range of products in the health care field within its Consumer, Pharmaceutical and Medical Devices, and Diagnostics business segments.

Estimated WACC for the firm today is 7.50% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2004 | 8956 |

2005 | 9245 |

2006 | 11510 |

2007 | 11939 |

2008 | 11906 |

2009 | 14206 |

2010 | 14001 |

2011 | 11405 |

2012 | 12462 |

2013 | 13819 |

Average Annual Growth FCF: ~ 6%

CAGR FCF: ~ 5%

Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 7% per year

Internal Growth Rate: ~ 6%

Sustainable Growth Rate: ~ 11%

**Scenario 1**

- Start at $13819 million FCF
- Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 13819 |

1 | 14786 |

2 | 15821 |

3 | 16929 |

4 | 18114 |

5 | 19382 |

Terminal Value | 276333 |

The firm's future free cash flows, discounted at a WACC of 7.50%, give a present value for the entire firm (Debt + Equity) of $260565 million. If the firm's fair value of debt is estimated at $15013 million, then the fair value of the firm's equity could be $245552 million. $245552 million / 2830 million outstanding shares is approximately $87 per share and a 20% margin of safety is $70/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 11% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 13819 |

1 | 15339 |

2 | 17026 |

3 | 18899 |

4 | 20978 |

5 | 23286 |

Terminal Value | 344403 |

- Present Value of the entire firm (Debt + Equity): $315975 million
- Value of Equity: $300962 million or $106/share
- 20% margin of safety is $85/share

Sources

**Disclosure: **The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Yield: ~ 2.56%

Johnson & Johnson is a holding company, which is engaged in the research and development, manufacture and sale of a range of products in the health care field within its Consumer, Pharmaceutical and Medical Devices, and Diagnostics business segments.

Estimated WACC for the firm today is 7.50% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2004 | 8956 |

2005 | 9245 |

2006 | 11510 |

2007 | 11939 |

2008 | 11906 |

2009 | 14206 |

2010 | 14001 |

2011 | 11405 |

2012 | 12462 |

2013 | 13819 |

Average Annual Growth FCF: ~ 6%

CAGR FCF: ~ 5%

Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 7% per year

Internal Growth Rate: ~ 6%

Sustainable Growth Rate: ~ 11%

**Scenario 1**

- Start at $13819 million FCF
- Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 13819 |

1 | 14786 |

2 | 15821 |

3 | 16929 |

4 | 18114 |

5 | 19382 |

Terminal Value | 276333 |

The firm's future free cash flows, discounted at a WACC of 7.50%, give a present value for the entire firm (Debt + Equity) of $260565 million. If the firm's fair value of debt is estimated at $15013 million, then the fair value of the firm's equity could be $245552 million. $245552 million / 2830 million outstanding shares is approximately $87 per share and a 20% margin of safety is $70/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 11% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 13819 |

1 | 15339 |

2 | 17026 |

3 | 18899 |

4 | 20978 |

5 | 23286 |

Terminal Value | 344403 |

- Present Value of the entire firm (Debt + Equity): $315975 million
- Value of Equity: $300962 million or $106/share
- 20% margin of safety is $85/share

Sources

**Disclosure: **The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Yield: ~ 2.74%

Analog Devices Inc is engaged in the design, manufacture and marketing of a portfolio of high-performance analog, mixed-signal and digital signal processing integrated circuits used in virtually all types of electronic equipment.

Estimated WACC for the firm today is 12.93% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2004 | 632 |

2005 | 587 |

2006 | 492 |

2007 | 679 |

2008 | 512 |

2009 | 376 |

2010 | 880 |

2011 | 778 |

2012 | 682 |

2013 | 789 |

Average Annual Growth FCF: ~ 10%

CAGR FCF: ~ 2.5%

Consensus Forecast Industry 5-Year Growth: ~ 24.6% per year

Consensus Forecast Company 5-Year Growth: ~ 11% per year

Internal Growth Rate: ~ 4.5%

Sustainable Growth Rate: ~ 6%

**Scenario 1**

Average FCF (2013 - 2011) is $750 million

- Start at $750 million FCF
- Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 750 |

1 | 833 |

2 | 924 |

3 | 1026 |

4 | 1139 |

5 | 1264 |

Terminal Value | 10847 |

The firm's future free cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $9467 million. If the firm's fair value of debt is estimated at $872 million, then the fair value of the firm's equity could be $8595 million. $8595 million / 311 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 11% per year, then 7% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 750 |

1 | 833 |

2 | 924 |

3 | 1026 |

4 | 1139 |

5 | 1264 |

Terminal Value | 23647 |

- Present Value of the entire firm (Debt + Equity): $16435 million
- Value of Equity: $15563 million or $50/share
- 20% margin of safety is $40/share

Sources

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

Yield: ~ 2.74%

Analog Devices Inc is engaged in the design, manufacture and marketing of a portfolio of high-performance analog, mixed-signal and digital signal processing integrated circuits used in virtually all types of electronic equipment.

Estimated WACC for the firm today is 12.93% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2004 | 632 |

2005 | 587 |

2006 | 492 |

2007 | 679 |

2008 | 512 |

2009 | 376 |

2010 | 880 |

2011 | 778 |

2012 | 682 |

2013 | 789 |

Average Annual Growth FCF: ~ 10%

CAGR FCF: ~ 2.5%

Consensus Forecast Industry 5-Year Growth: ~ 24.6% per year

Consensus Forecast Company 5-Year Growth: ~ 11% per year

Internal Growth Rate: ~ 4.5%

Sustainable Growth Rate: ~ 6%

**Scenario 1**

Average FCF (2013 - 2011) is $750 million

- Start at $750 million FCF
- Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 750 |

1 | 833 |

2 | 924 |

3 | 1026 |

4 | 1139 |

5 | 1264 |

Terminal Value | 10847 |

The firm's future free cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $9467 million. If the firm's fair value of debt is estimated at $872 million, then the fair value of the firm's equity could be $8595 million. $8595 million / 311 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 11% per year, then 7% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 750 |

1 | 833 |

2 | 924 |

3 | 1026 |

4 | 1139 |

5 | 1264 |

Terminal Value | 23647 |

- Present Value of the entire firm (Debt + Equity): $16435 million
- Value of Equity: $15563 million or $50/share
- 20% margin of safety is $40/share

Sources

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

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.

*(click to enlarge)* *(click to enlarge)* *(click to enlarge)*

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

**L-3 Communications Holdings Inc**

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

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.

*(click to enlarge)* *(click to enlarge)* *(click to enlarge)*

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

**L-3 Communications Holdings Inc**

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

Yield: ~ 1.52%

Hormel Foods Corporation is engaged in the production of meat and food products and the marketing of those products throughout the United States and internationally.

Estimated WACC for the firm today is 9.03% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2004 | 214 |

2005 | 322 |

2006 | 185 |

2007 | 211 |

2008 | 146 |

2009 | 454 |

2010 | 396 |

2011 | 394 |

2012 | 385 |

2013 | 531 |

Average Annual Growth FCF: ~ 25%

CAGR FCF: ~ 11%

Consensus Forecast Industry 5-Year Growth: ~ 13.6% per year

Consensus Forecast Company 5-Year Growth: ~ 11% per year

Internal Growth Rate: ~ 7.8%

Sustainable Growth Rate: ~ 12.6%

**Scenario 1**

Average FCF (2013 - 2009) is $432 million

- Start at $432 million FCF
- Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 432 |

1 | 480 |

2 | 532 |

3 | 591 |

4 | 656 |

5 | 728 |

Terminal Value | 8948 |

The firm's future free cash flows, discounted at a WACC of 9.03%, give a present value for the entire firm (Debt + Equity) of $8088 million. If the firm's fair value of debt is estimated at $262 million, then the fair value of the firm's equity could be $7826 million. $7826 million / 264 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 11% per year, then 3.75% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 432 |

1 | 480 |

2 | 532 |

3 | 591 |

4 | 656 |

5 | 728 |

Terminal Value | 15303 |

- Present Value of the entire firm (Debt + Equity): $12212 million
- Value of Equity: $11950 million or $45/share
- 20% margin of safety is $36/share

**Conclusion: Closing out position in HRL for my Fantasy Portfolio today; looking for better value**

Sources

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

Yield: ~ 1.52%

Hormel Foods Corporation is engaged in the production of meat and food products and the marketing of those products throughout the United States and internationally.

Estimated WACC for the firm today is 9.03% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2004 | 214 |

2005 | 322 |

2006 | 185 |

2007 | 211 |

2008 | 146 |

2009 | 454 |

2010 | 396 |

2011 | 394 |

2012 | 385 |

2013 | 531 |

Average Annual Growth FCF: ~ 25%

CAGR FCF: ~ 11%

Consensus Forecast Industry 5-Year Growth: ~ 13.6% per year

Consensus Forecast Company 5-Year Growth: ~ 11% per year

Internal Growth Rate: ~ 7.8%

Sustainable Growth Rate: ~ 12.6%

**Scenario 1**

Average FCF (2013 - 2009) is $432 million

- Start at $432 million FCF

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 432 |

1 | 480 |

2 | 532 |

3 | 591 |

4 | 656 |

5 | 728 |

Terminal Value | 8948 |

The firm's future free cash flows, discounted at a WACC of 9.03%, give a present value for the entire firm (Debt + Equity) of $8088 million. If the firm's fair value of debt is estimated at $262 million, then the fair value of the firm's equity could be $7826 million. $7826 million / 264 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 11% per year, then 3.75% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 432 |

1 | 480 |

2 | 532 |

3 | 591 |

4 | 656 |

5 | 728 |

Terminal Value | 15303 |

- Present Value of the entire firm (Debt + Equity): $12212 million
- Value of Equity: $11950 million or $45/share
- 20% margin of safety is $36/share

**Conclusion: Closing out position in HRL for my Fantasy Portfolio today; looking for better value**

Sources

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

Yield: ~ 2.34%

Applied Materials, Inc., provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic and related industries.

Estimated WACC for the firm today is 17.31% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2004 | 1437 |

2005 | 1047 |

2006 | 1756 |

2007 | 1945 |

2008 | 1423 |

2009 | 84 |

2010 | 1554 |

2011 | 2217 |

2012 | 1689 |

2013 | 426 |

Average Annual Growth FCF: ~ 180.5%

CAGR FCF: ~ -12.64%

Consensus Forecast Industry 5-Year Growth: ~ 17% per year

Consensus Forecast Company 5-Year Growth: ~ 8% per year

Internal Growth Rate: ~ -1.7%

Sustainable Growth Rate: ~ -2.81%

**Scenario 1**

Average FCF (2013-2011) is $1444 million

- Start at $1444 million FCF
- Assume a 5-year growth rate in FCF of 8% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1444 |

1 | 1560 |

2 | 1684 |

3 | 1819 |

4 | 1965 |

5 | 2122 |

Terminal Value | 13235 |

The firm's future free cash flows, discounted at a WACC of 17.31%, give a present value for the entire firm (Debt + Equity) of $11629 million. If the firm's fair value of debt is estimated at $2100 million, then the fair value of the firm's equity could be $9529 million. $9529 million / 1200 million outstanding shares is approximately $8 per share and a 20% margin of safety is $6.40/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 12.00% per year, then 9.50% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1444 |

1 | 1617 |

2 | 1811 |

3 | 2029 |

4 | 2272 |

5 | 2545 |

Terminal Value | 36480 |

- Present Value of the entire firm (Debt + Equity): $22715 million
- Value of Equity: $20615 million or $17/share
- 20% margin of safety is $13.60/share

**Conclusion: Closing out position in AMAT for my Fantasy Portfolio today.**

Sources

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

Yield: ~ 2.34%

Applied Materials, Inc., provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic and related industries.

Estimated WACC for the firm today is 17.31% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2004 | 1437 |

2005 | 1047 |

2006 | 1756 |

2007 | 1945 |

2008 | 1423 |

2009 | 84 |

2010 | 1554 |

2011 | 2217 |

2012 | 1689 |

2013 | 426 |

Average Annual Growth FCF: ~ 180.5%

CAGR FCF: ~ -12.64%

Consensus Forecast Industry 5-Year Growth: ~ 17% per year

Consensus Forecast Company 5-Year Growth: ~ 8% per year

Internal Growth Rate: ~ -1.7%

Sustainable Growth Rate: ~ -2.81%

**Scenario 1**

Average FCF (2013-2011) is $1444 million

- Start at $1444 million FCF
- Assume a 5-year growth rate in FCF of 8% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1444 |

1 | 1560 |

2 | 1684 |

3 | 1819 |

4 | 1965 |

5 | 2122 |

Terminal Value | 13235 |

The firm's future free cash flows, discounted at a WACC of 17.31%, give a present value for the entire firm (Debt + Equity) of $11629 million. If the firm's fair value of debt is estimated at $2100 million, then the fair value of the firm's equity could be $9529 million. $9529 million / 1200 million outstanding shares is approximately $8 per share and a 20% margin of safety is $6.40/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 12.00% per year, then 9.50% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1444 |

1 | 1617 |

2 | 1811 |

3 | 2029 |

4 | 2272 |

5 | 2545 |

Terminal Value | 36480 |

- Present Value of the entire firm (Debt + Equity): $22715 million
- Value of Equity: $20615 million or $17/share
- 20% margin of safety is $13.60/share

**Conclusion: Closing out position in AMAT for my Fantasy Portfolio today.**

Sources

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

Current Price: ~ $87/share

Yield: ~ 2.46%

Raytheon Company provides technology-driven solutions that provide integrated mission systems for the critical defense and non-defense needs of its customers.

*(click to enlarge)* *(click to enlarge)*

Estimated WACC for the firm today is 8.49% 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 | 1141 |

2004 | 1605 |

2005 | 2102 |

2006 | 2371 |

2007 | 800 |

2008 | 1637 |

2009 | 2378 |

2010 | 1556 |

2011 | 1670 |

2012 | 1542 |

YTD Free Cash Flow for nine months ending 9/30/2013 is $1112million; $1483 million annualized

Average Annual Growth FCF: ~ 14.8%

CAGR FCF: ~ 3.4%

Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 9.6% per year

Internal Growth Rate: ~ 4.8%

Sustainable Growth Rate: ~ 17.4%

**Scenario 1**

Average FCF (YTD, 2012, 2011, 2010) is $1563 million

- Start at $1563 million FCF
- Assume a 5-year growth rate in FCF of 9.6% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1563 |

1 | 1713 |

2 | 1878 |

3 | 2058 |

4 | 2255 |

5 | 2472 |

Terminal Value | 31911 |

The firm's future free cash flows, discounted at a WACC of 8.49%, give a present value for the entire firm (Debt + Equity) of $29291 million. If the firm's fair value of debt is estimated at $5046 million, then the fair value of the firm's equity could be $24245 million. $24245 million / 319 million outstanding shares is approximately $76 per share and a 20% margin of safety is $61/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 12% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1563 |

1 | 1751 |

2 | 1961 |

3 | 2196 |

4 | 2459 |

5 | 2755 |

Terminal Value | 36340 |

- Present Value of the entire firm (Debt + Equity): $32787 million
- Value of Equity: $27741 million or $87/share
- 20% margin of safety is $70/share

Sources

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

Current Price: ~ $87/share

Yield: ~ 2.46%

Raytheon Company provides technology-driven solutions that provide integrated mission systems for the critical defense and non-defense needs of its customers.

*(click to enlarge)* *(click to enlarge)*

Estimated WACC for the firm today is 8.49% 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 | 1141 |

2004 | 1605 |

2005 | 2102 |

2006 | 2371 |

2007 | 800 |

2008 | 1637 |

2009 | 2378 |

2010 | 1556 |

2011 | 1670 |

2012 | 1542 |

YTD Free Cash Flow for nine months ending 9/30/2013 is $1112million; $1483 million annualized

Average Annual Growth FCF: ~ 14.8%

CAGR FCF: ~ 3.4%

Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 9.6% per year

Internal Growth Rate: ~ 4.8%

Sustainable Growth Rate: ~ 17.4%

**Scenario 1**

Average FCF (YTD, 2012, 2011, 2010) is $1563 million

- Start at $1563 million FCF
- Assume a 5-year growth rate in FCF of 9.6% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1563 |

1 | 1713 |

2 | 1878 |

3 | 2058 |

4 | 2255 |

5 | 2472 |

Terminal Value | 31911 |

The firm's future free cash flows, discounted at a WACC of 8.49%, give a present value for the entire firm (Debt + Equity) of $29291 million. If the firm's fair value of debt is estimated at $5046 million, then the fair value of the firm's equity could be $24245 million. $24245 million / 319 million outstanding shares is approximately $76 per share and a 20% margin of safety is $61/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 12% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 1563 |

1 | 1751 |

2 | 1961 |

3 | 2196 |

4 | 2459 |

5 | 2755 |

Terminal Value | 36340 |

- Present Value of the entire firm (Debt + Equity): $32787 million
- Value of Equity: $27741 million or $87/share
- 20% margin of safety is $70/share

Sources

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