Seeking Alpha

Eric Cota's  Instablog

Eric Cota
Send Message
I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
My blog:
Manzanita Drive
  • Harris Corporation: Cash Flow Valuation Update 0 comments
    Aug 30, 2012 5:02 PM | about stocks: HRS

    Current Price: ~ $47/share
    Yield: ~ 2.57%

    Harris sells communications products and services to government and commercial customers in more than 150 countries. With recent acquisitions in new end markets, Harris will report results in RF communications (38% of fiscal 2011 sales), government communications (29%), and integrated network solutions (33%). The U.S. government represented 72% of sales in fiscal 2011. Based in Melbourne, Fla., Harris has operations worldwide and employs about 17,000 people.

    Estimated WACC for the firm today is 10.24% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    200380
    2004204
    2005226
    2006188
    2007310
    2008404
    2009545
    2010605
    2011508
    2012619

    (click to enlarge)

    Average Annual Growth FCF: ~ 33%

    CAGR FCF: ~ 25.5%
    Consensus Forecast Industry 5-Year Growth: ~ 15% per year

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

    Internal Growth Rate: ~ -2% (Dividends per share > Earnings per share in 2012)

    Scenario 1
    Average FCF (2012, 2011, 2010) is $577 million

    • Start at $577 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

    YearFCF $Millions
    0577
    1594
    2612
    3631
    4649
    5669
    Terminal Value6727

    The firm's future free cash flows, discounted at a WACC of 10.24%, give a present value for the entire firm (Debt + Equity) of $6495 million. If the firm's fair value of debt is estimated at $2148 million, then the fair value of the firm's equity could be $4347 million. $4347 million / 112 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 6% per year, then 2.25% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0577
    1612
    2648
    3687
    4728
    5772
    Terminal Value10242
    • Present Value of the entire firm (Debt + Equity): $8858 million
    • Value of Equity: $6710 million or $60/share
    • 20% margin of safety is $48/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Harris.com

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

    Stocks: HRS
Back To Eric Cota's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.