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L-3 Communications Holdings Inc: LLL Cash Flow Valuation Update

Jan. 06, 2014 4:18 PM ETLLL-OLD
Eric Cota profile picture
Eric Cota's Blog
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Value, Long/Short Equity

Seeking Alpha Analyst Since 2011

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 experience as a SBA lender. B.A. Applied Mathematics, M.B.A. Business Administration. Presently seeking a position in finance. cota.eric@gmail.com

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



Yahoo! Finance

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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