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L-3 Communications Holdings Inc: Cash Flow Valuation Update

|Includes:L-3 Communications Holdings Inc. (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:

Year FCF $Millions
2002 256
2003 373
2004 540
2005 727
2006 918
2007 1113
2008 1169
2009 1221
2010 1280
2011 1292

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

Year FCF $Millions
0 1264
1 1302
2 1341
3 1381
4 1423
5 1465
Terminal Value 16676

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

Year FCF $Millions
0 1264
1 1302
2 1341
3 1381
4 1423
5 1465
Terminal Value 11610
  • 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