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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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  • Harris Corporation: Cash Flow Valuation 4 comments
    Jan 26, 2012 4:41 PM | about stocks: HRS
    Current Price: ~ $39/share
    Projected Yield: ~ 2.88%

    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 (39% of fiscal 2010 sales), government communications (33%), and integrated network solutions (28%). The U.S. government represented 76% of sales in 2010. Based in Melbourne, Fla., Harris has operations worldwide and employs more than 15,800 people.

    I estimated the firm's WACC today at 7.23% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2002161
    200380
    2004204
    2005226
    2006188
    2007310
    2008404
    2009545
    2010605
    2011508
    TTM252

    Average Annual Growth FCF: ~ 25%

    CAGR FCF: ~ 14%
    Consensus Forecast Industry 5-Year Growth: ~ 16% per year

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

    Internal Growth Rate: ~ 9%

    Sustainable Growth Rate: ~ 24%

    Note: Regarding the firm's Q1 2012 drop in FCF, Harris CFO, Gary McArthur said:

    We ended the quarter with cash on hand of $305 million. Cash flow generated from operating activities was $79 million in the quarter as compared to $295 million in the prior year. All 3 segments generated positive operating cash flow. Operating cash flow was weaker mainly as a result of lower operating income and collections primarily at RF Communications, wherein in the prior year, expedited shipments and collections on tactical radios for MRAP vehicles benefited income and cash flow, and in the first quarter of this year, the transition to the new factory, delayed shipments and ultimately collections. Our expectations for the corporation are that cash flow from operations will increase steadily over the next 3 quarters as operating income increases, and days sales outstanding declined from 56 days as of the end of the first quarter to the more typical low 50s. Though we are maintaining our guidance for operating cash flow at $825 million to $875 million. As a result of our slower-than-expected start to the year, we will continue to monitor this closely.

    Depreciation and amortization was $63 million as compared to $47 million in the prior year. Our expectations for depreciation and amortization for fiscal year 2012 are unchanged at $280 million to $290 million. Capital expenditures were $82 million as compared to $41 million in the first quarter of fiscal 2011. Our current guidance for fiscal year 2012 CapEx is unchanged to between $265 million and $285

    Starting at $508 million FCF, assuming the company achieves a 5-year growth rate in FCF of 8% per year, and assuming that after the next five years, the company achieves no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0508
    1549
    2593
    3640
    4691
    5746
    Terminal Value11153

    The firm's future cash flows, discounted at a WACC of 7.23%, give a present value for the entire firm (Debt + Equity) of $10463 million. If the firm's fair value of debt is estimated at $2200 million, then the fair value of the firm's equity could be $8263 million. $8263 million / 116 million outstanding shares is approximately $71 per share and a 20% margin of safety is $57/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
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Comments (4)
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  • PSU Investor
    , contributor
    Comments (61) | Send Message
     
    Good stuff here
    30 Jan 2012, 02:08 AM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Hey PSU,

     

    I'm thinking Harris is a good value here. But I'm not sure how concerned I should be with the high concentration of sales to the U.S. government...
    30 Jan 2012, 03:08 AM Reply Like
  • PSU Investor
    , contributor
    Comments (61) | Send Message
     
    Yeah, looking at there site, it does seem as if they have a huge demand concentrated from government. Defense is supposed to be cut a few hundred billion over the next few years I had heard.

     

    What % of the demand from government can you foresee slowing?
    Definitely a question the prudent value investor would like to have a probability on.

     

    With that in mind, without a deep look, it appears undervalued. In your DCF, you use a 5 yr excess growth period at 8%, and ltgr at 0%. After subtracting a 20% margin of safety, it is still $17 under.

     

    What do you get as true value if you decrease the excess growth period from 5 to 3?

     

    Valuepro agrees on a deep discount btw
    30 Jan 2012, 07:19 AM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
     
    Author’s reply » Q: What do you get as true value if you decrease the excess growth period from 5 to 3?

     

    All else being equal, something like this:

     

    Year FCF $Millions
    0 508
    1 549
    2 593
    3 640
    Terminal Value 9560

     

    Present value of the firm's future cash flows discounted at 7.23% is ~ $9808 million so equity in the firm would be ~ $7608 million --> $66/share and 20% margin of safety is $53/share.

     

    Thanks for the comments -- Eric
    30 Jan 2012, 01:23 PM Reply Like
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