lmt final project (final)
TRANSCRIPT
Emilien C. Davis (2639510)
FIN-4604 SPR 2014
27, April 2014
1. Headquarters: Bethesda, Maryland
2. Global Security & Logistics Company
• Aeronautics, Info. Systems/Global Solutions,
Missiles and Fire Control, Mission Systems and
Training, Space Systems
• Produces: F-35 Lightning, C-130, F-16, F-22, and
the C5M
3. 116,000 Employees in the United States and
Internationally
4. Lockheed Corporation Founded in 1912, Martin
Marietta Founded 1961; Firms Merged in 1995
5. Trades on the NYSE, A part of the Standard and
Poor’s 500
Company Overview
1. Stock Currently Selling for 160.14 (4/17/2014;
3:07 PM)
2. Heavily dependent upon government contracts
• Budget Control Act, Sequestration and
proposed Department of Defense cuts likely to
affect revenues
3. Greater competition in Information Systems and
Global Solutions also poses a financial threat
4. Concerns arise due to reduction/cuts to hellfire
missile system and Submarine fleet (effects
Trident II D5 ballistic missile)
5. F-35 Project costs currently exceed $396 Billion
Dollars, but there is also an orders backlog
Points to Consider
• Krm=.08
• Krf=.02
• β=.65 Ke=Krf+ β(Krm+ Krf)
• .02+.65(.08-.02)=.059
Estimate of CAPM
1) Top Line Growth:
• Geometric Mean= End
Beginning
1
n− 1
$45358
$41212
1
5− 1 = 1.0193564 − 1 =
.0193564 or 1.94%
2) Bottom Line Growth
• Geometric Mean= $2981
$3217
1
5− 1 = 0.9848774 − 1 = −0.0151226 or −
1.51%
Historical Growth Rates
Year 2008 2009 2010 2011 2012 2013
Revenue (in Millions) $41212.00 $43,867.00 $ 45,671.00 $ 46,499.00 $ 47,182.00 $ 45,358.00
Year 2008 2009 2010 2011 2012 2013
Net Earnings(in Millions $ 3,217.00 $2,973.00 $2,878.00 $2,655.00 $2,745.00 $2,981.00
1. Also known as the Supernormal Dividend Growth Model
Variation (according to Investopedia)
2. To start: Dividend=$5.32, EPS=$9.14, Return on Equity=
1.1902
3. Payout Ratio=DIV
EPS=5.32
9.14= .5.82
4. Retention Rate= 1-Payout Ratio= 1-.582= 0.418
5. Growth Estimate= Retention Rate x ROE= 0.418 x .582=
0.2433 or 24.33%
Dividend Discount Model
3) Short Term Growth:
• Retention Rate=0.418
• Profit Margin=.0657
• Asset Turnover=1.253
• Financial Leverage=1.251
• g = 0.418 x 0.0657 x 1.253 x 1.251 = 0.04305 or 4.31%
4)Average Growth Rate:
.0431 + .2433 + .0151 + .0194
4= 0.0802 or 8.02%
Historical Growth Rates
• D0=$5.32
• g=.03
• Ke=.059 (as previously stated)
• D1=D0(1+g) or 5.32(1.03)= $5.48
• Gordon Growth Model: D1
Ke−𝑔or
5.48
.059−.03= $188.97
• According to this model, LMT is undervalued by
$28.83
Gordon Growth Model
• Ke=.059
• t=.3 (for purposes of demonstration)
• Kd=.063, V=$50.67B
• D=$6.15B
• E=$44.52B
• V=$50.67B
• Kwacc = KeE
V+ Kd 1 − t
D
V
• . 05944.52B
50.67B+ .063 1 − .3
6.15B
50.67B= Kwacc = 0.057193 or
5.719%
• *Source of Debt, Equity, and Market Cap(V): Yahoo Finance
(LMT Key Statistics)
WACC Estimation
H-Model Analysis
Risk Free Rate 0.02
Market Risk 0.08
Beta 1.15
Ke 0.089
Dividend Per Share $5.32
Growth Rate (gn) 0.03
NI Available to Shareholders $2,950,000,000
Dividend Paid $1,697,080,000
Asset Turnover 1.253
Financial Leverage 1.251
Revenue $45,360,000,000
H=𝑌𝑒𝑎𝑟𝑠
2=10 𝑦𝑒𝑎𝑟𝑠
2
5
Retention Rate 0.418
Profit Margin 0.0657
Initial Growth 0.0802
Pro Forma Sales Growth 0.0185
Pro Forma NI Growth -0.0151
Estimates for Initial Growth (ga) 0.0802
• P0=DPS0x 1−ga
Ke−gn+
DPS0 xH x ga−gn
Ke−gn
• P0 =5.32 x .9198
.029+
5.32 x 5 x .0502
.029= 168.73 + 46.05 = $214.78
• The H-Model Analysis also indicates a stock that is greatly undervalued by
$54.64
1) Projected Cash Flows Are As Follows (In Millions):
• $8413.15 (2014); $8386.16 (2015); $8356.52 (2016); $8325.12 (2017)
2) Setting Cash Flows to Present Value: 𝐶𝐹
1+𝑊𝐴𝐶𝐶 𝑛 , remember,
WACC=.08355
(2014): 8413.15
1.057193 1 = $7958.29; (2015): 8386.16
1.057193 2 = $7503.34
(2016) 8356.52
1.057193 3 = $7072.33 ; (2017): 8325.12
1.057193 4 = $6664.59
3)Find the Long term Valuation (Forever) 𝐿𝑎𝑠𝑡 𝐶𝐹 𝑥 1+𝑔
𝑊𝐴𝐶𝐶−𝑔𝑓𝑜𝑟𝑒𝑣𝑒𝑟
; 𝑔𝑓𝑜𝑟𝑒𝑣𝑒𝑟=.03, FCFE Growth=-0.00335168325.12 𝑥 0.9966484
.057193 − .03= $305123.29
4) Find PV of Forever: 305123.29
1.057193 4 = $244263.31
Cash Flow Explanations
5) Add all PV Cash Flows 7958.29 + 7503.34 + 7072.33 +6664.59 + 244263.31 = $273461.86
6)𝑃0 =𝑃𝑉
# 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡 𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔=
273461.86
319= $857.25
Once Again, Extremely undervalued (yet, Maybe not to this
particular extent). This Particular Model May be an Outlier in the
case of this stock, but nonetheless, it indicates an undervaluing
of $697.11!
Cash Flow Explanations (cont.)
Pro-Forma
• Using these factors, Stock price is actually undervalued, price
should be $450.39! !!!
Historical Data Projections Geo. Mean
Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue $ 41,212.00 $ 43,867.00 $ 45,671.00 $ 46,499.00 $ 47,182.00 $ 45,358.00 $ 46,200.15 $ 47,057.93 $ 47,931.64 $ 48,821.58 0.0185667
Net Earnings $ 3,217.00 $ 2,973.00 $ 2,878.00 $ 2,655.00 $ 2,745.00 $ 2,981.00 $ 2,935.92 $ 2,891.52 $ 2,847.79 $ 2,804.73 -0.0151226
Depreciation $ 727.00 $ 1,014.00 $ 1,052.00 $ 1,008.00 $ 998.00 $ 990.00 $ 990.00 $ 990.00 $ 990.00 $ 990.00
NE + Depreciation $ 3,944.00 $ 3,987.00 $ 3,930.00 $ 3,663.00 $ 3,743.00 $ 3,971.00 $ 3,925.92 $ 3,881.52 $ 3,837.79 $ 3,794.73
Net Borrowing $ 5,400.67 $ 5,400.67 $ 5,400.67 $ 5,400.67 $ 5,400.67 $ 5,400.67
Capital Expenditures $ (926.00) $ (1,166.00) $ (1,074.00) $ (987.00) $ (942.00) $ (836.00) $ (834.31) $ (832.62) $ (830.93) $ (829.25) -0.0202415
Δ Working Capital $ (291.00) $ (147.00) $ 570.00 $ 674.00 $ (1,061.00) $ (98.00) $ (78.83) $ (63.41) $ (51.01) $ (41.03) -0.1956101
Free Cash Flow to Equity (FCFE) $ 8,437.67 $ 7,764.71 $ 7,142.75 $ 6,568.69 $ 6,039.41
1. Revenue is set to continually increase for the foreseeable
future, seeing the popularity of the new F-35 Project and
projections to replace the F-16 Fighting Falcon and be in
service for a projected 55 years
2. The backlog is further showing promise for revenue growth,
as those orders are being counted in future periods.
3. Although there is a consistent drop in bottom line, this could
be attributed to project costs and should be reversed upon
the conclusion of Research and Development and Release
periods.
4. Newer innovations should also circumvent military cuts as the
perception of modernizing the military is a recurring theme
with the current administration
5. All models indicate that the stock value should continue to
grow, perhaps rapidly at some point, so purchase of the stock
and/or Put Contracts is IMPERATIVE if the opportunity poses
Conclusions:
LMT Pro-Forma attached to Email, enjoy your
move.
Thank You for Your Time