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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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  • 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:

    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
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