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General Dynamics: cash flow valuation

|Includes: General Dynamics Corporation (GD)
Current Price: ~ $70/share
Projected Yield: ~ 2.69%
 
 
Falls Church, Va.-based General Dynamics manufactures ships, armored vehicles, defense-oriented information technology systems, and business jets. The firm gets around 72% of revenue from the Department of Defense and the rest from foreign sales and Gulfstream business jets. In 2010, the firm generated $32.4 billion in sales and $2.6 billion in earnings.
 
I estimated the firm's WACC today at 12.93% using the Capital Asset Pricing Model and the company's recent SEC filings.
 
Recent free cash flows and growth rates:
Year
FCF $Millions
2001
747
2002
861
2003
1499
2004
1536
2005
1777
2006
1794
2007
2451
2008
2620
2009
2455
2010
2616
TTM
2735
 
Average Annual Growth FCF: ~ 17%
CAGR FCF: ~ 15%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 8% per year
 
Starting at $2616 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 in FCF or 0% growth per year forever:
 
Discounted Cash Flow Valuation
Year
FCF $Millions
0
2616
1
2825
2
3051
3
3295
4
3559
5
3844
Terminal Value
32105
 
The firm's future cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $28,942 million. If the firm's fair value of debt is estimated at $4200 million, then the fair value of the firm's equity could be $24,742 million.  $24,742 million / 372 million outstanding shares is approximately $67 per share and a 20% margin of safety is $53/share.
 

Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.