Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Harris Corporation: Cash Flow Valuation

|Includes: L3Harris Technologies, Inc. (LHX)

Current Price: ~ $39/share
Projected Yield: ~ 2.88%

Harris sells communications products and services to government and commercial customers in more than 150 countries. With recent acquisitions in new end markets, Harris will report results in RF communications (39% of fiscal 2010 sales), government communications (33%), and integrated network solutions (28%). The U.S. government represented 76% of sales in 2010. Based in Melbourne, Fla., Harris has operations worldwide and employs more than 15,800 people.

I estimated the firm's WACC today at 7.23% 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 161
2003 80
2004 204
2005 226
2006 188
2007 310
2008 404
2009 545
2010 605
2011 508
TTM 252

Average Annual Growth FCF: ~ 25%

CAGR FCF: ~ 14%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 8% per year

Internal Growth Rate: ~ 9%

Sustainable Growth Rate: ~ 24%

Note: Regarding the firm's Q1 2012 drop in FCF, Harris CFO, Gary McArthur said:

We ended the quarter with cash on hand of $305 million. Cash flow generated from operating activities was $79 million in the quarter as compared to $295 million in the prior year. All 3 segments generated positive operating cash flow. Operating cash flow was weaker mainly as a result of lower operating income and collections primarily at RF Communications, wherein in the prior year, expedited shipments and collections on tactical radios for MRAP vehicles benefited income and cash flow, and in the first quarter of this year, the transition to the new factory, delayed shipments and ultimately collections. Our expectations for the corporation are that cash flow from operations will increase steadily over the next 3 quarters as operating income increases, and days sales outstanding declined from 56 days as of the end of the first quarter to the more typical low 50s. Though we are maintaining our guidance for operating cash flow at $825 million to $875 million. As a result of our slower-than-expected start to the year, we will continue to monitor this closely.

Depreciation and amortization was $63 million as compared to $47 million in the prior year. Our expectations for depreciation and amortization for fiscal year 2012 are unchanged at $280 million to $290 million. Capital expenditures were $82 million as compared to $41 million in the first quarter of fiscal 2011. Our current guidance for fiscal year 2012 CapEx is unchanged to between $265 million and $285

Starting at $508 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 or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 508
1 549
2 593
3 640
4 691
5 746
Terminal Value 11153

The firm's future cash flows, discounted at a WACC of 7.23%, give a present value for the entire firm (Debt + Equity) of $10463 million. If the firm's fair value of debt is estimated at $2200 million, then the fair value of the firm's equity could be $8263 million. $8263 million / 116 million outstanding shares is approximately $71 per share and a 20% margin of safety is $57/share.


Yahoo! Finance

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