L-3 Communications Holdings Inc: LLL Cash Flow Valuation Update
Value, Long/Short Equity
Seeking Alpha Analyst Since 2011
Current Price: ~ $106/share
Yield: ~ 2.09%
L-3 Communications Holdings, Inc is engaged as a system contractor in aircraft modernization & maintenance, Command, Control, Communications, Intelligence, Surveillance and Reconnaissance systems, and government services.
Estimated WACC for the firm today is 9.72% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
| Year | FCF $Millions |
| 2003 | 373 |
| 2004 | 540 |
| 2005 | 727 |
| 2006 | 918 |
| 2007 | 1113 |
| 2008 | 1169 |
| 2009 | 1221 |
| 2010 | 1280 |
| 2011 | 1292 |
| 2012 | 1096 |
| 2013 guidance* | 1010 |
* Free cash flow guidance remains $1,010,000,000 - Ralph G. D'Ambrosio, Chief Financial Officer and Senior Vice President; Q3 2013 earnings call transcript
Average Annual Growth FCF: ~ 14.11%
CAGR FCF: ~ 12.72%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year
Consensus Forecast Company 5-Year Growth: ~ 2% per year
Internal Growth Rate: ~ 4%
Sustainable Growth Rate: ~ 11%
Scenario 1
Average FCF (2013* - 2011) is $1133 million
- Start at $1133 million FCF
- Assume a 5-year growth rate in FCF of 2% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 1133 |
| 1 | 1156 |
| 2 | 1179 |
| 3 | 1202 |
| 4 | 1226 |
| 5 | 1251 |
| Terminal Value | 13129 |
The firm's future free cash flows, discounted at a WACC of 9.72%, give a present value for the entire firm (Debt + Equity) of $12833 million. If the firm's fair value of debt is estimated at $3883 million, then the fair value of the firm's equity could be $8950 million. $8950 million / 89 million outstanding shares is approximately $101 per share and a 20% margin of safety is $81/share.
Scenario 2
All else being equal,
- Assume a 5-year growth rate in FCF of 6.25% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 1133 |
| 1 | 1204 |
| 2 | 1279 |
| 3 | 1359 |
| 4 | 1444 |
| 5 | 1534 |
| Terminal Value | 16773 |
- Present Value of the entire firm (Debt + Equity): $15699 million
- Value of Equity: $11816 million or $133/share
- 20% margin of safety is $106/share
Conclusion: Closing out position in LLL for my Fantasy Portfolio today; looking for better value
Sources
L-3 Communications Holdings Inc
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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