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Eric Cota
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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
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  • Raytheon Company: Cash Flow Valuation Update 0 comments
    Nov 24, 2013 9:53 PM | about stocks: RTN

    Raytheon Company: $RTN Cash Flow Valuation Update

    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

    (click to enlarge)

    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


    Yahoo! Finance

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

    Stocks: RTN
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