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
  • L-3 Communications Holdings Inc: Cash Flow Valuation Update 0 comments
    Mar 16, 2012 2:21 PM | about stocks: LLL
    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:

    YearFCF $Millions
    2002256
    2003373
    2004540
    2005727
    2006918
    20071113
    20081169
    20091221
    20101280
    20111292

    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

    YearFCF $Millions
    01264
    11302
    21341
    31381
    41423
    51465
    Terminal Value16676

    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

    YearFCF $Millions
    01264
    11302
    21341
    31381
    41423
    51465
    Terminal Value11610
    • 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.

    Stocks: LLL
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.