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Raytheon Company: $RTN valuation update

|Includes: Raytheon Company (RTN)

Current Price: ~ $53/share


Raytheon Company ($RTN) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation posted January 19.  This update incorporates the firm's year-end 2010 data.  I believe $RTN is fairly valued at $56/share on a cash flow valuation basis.    


Raytheon is a major United States defense contractor with nearly $25 billion in annual sales that operates through six segments: integrated defense systems, intelligence and information, missile systems, network-centric systems, space and airborne systems, and technical services. Sales to the U.S. government account for more than 88% of the company's total sales. Waltham, Mass., based Raytheon employs 75,000 people.


I estimated the firm's WACC today at 9.46% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2000 529
2001 -353
2002 581
2003 1043
2004 1708
2005 2177
2006 2371
2007 800
2008 1711
2009 2445
2010 1556
 
Average Annual Growth FCF ex-2001: approx 27%
CAGR FCF: approx. 11%
Consensus Forecast Industry 5-Year Growth: approx. 13% per year
Consensus Forecast Company 5-Year Growth: approx. 8% per year
 
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 in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
Year FCF $ Millions
0 1556
1 1680
2 1815
3 1960
4 2117
5 2286
Terminal Value 26110
 
The firm's future cash flows, discounted at a WACC of 9.46%, give a present value for the entire firm (Debt + Equity) of $24,093 million. If the firm's fair value of debt is estimated at $3783 million, then the fair value of the firm's equity could be $20,310 million.  $20,310 million / 360 million outstanding shares is approximately $56 per share and a 20% margin of safety is $45/share.
 
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.