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Raytheon Company: Cash Flow Valuation Update

|Includes: Raytheon Company (RTN)

Current Price: ~ $55/share
Projected Yield: ~ 3.63%

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 72,000 people.

Estimated WACC for the firm today is 7.54% 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 443
2003 1141
2004 1605
2005 2102
2006 2371
2007 800
2008 1637
2009 2378
2010 1556
2011 1670

Average Annual Growth FCF: ~ 33%

CAGR FCF: ~ 16%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year

Consensus Forecast Company 5-Year Growth: ~ 9% per year

Internal Growth Rate: ~ 5%

Sustainable Growth Rate: ~ 16%

Scenario 1

  • Start at $1670 million FCF
  • Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1670
1 1820
2 1984
3 2163
4 2357
5 2570
Terminal Value 37156

The firm's future cash flows, discounted at a WACC of 7.54%, give a present value for the entire firm (Debt + Equity) of $34532 million. If the firm's fair value of debt is estimated at $5136 million, then the fair value of the firm's equity could be $29396 million. $29396 million / 333 million outstanding shares is approximately $88 per share and a 20% margin of safety is $70/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 5% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1670
1 1754
2 1841
3 1933
4 2030
5 2131
Terminal Value 29689
  • Present Value of the entire firm (Debt + Equity): $28421 million
  • Value of Equity: $23285 million or $70/share
  • 20% margin of safety is $56/share

Sources

Morningstar.com

Yahoo! Finance

Raytheon.com

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