LMT Final Project (Final)

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1. Emilien C. Davis (2639510) FIN-4604 SPR 2014 27, April 2014 2. 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 Company Overview 3. 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 Points to Consider 4. Krm=.08 Krf=.02 =.65 Ke=Krf+ (Krm+ Krf) .02+.65(.08-.02)=.059 Estimate of CAPM 5. 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 6. 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 7. 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 8. 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 or 5.48 .059.03 = $188.97 According to this model, LMT is undervalued by $28.83 Gordon Growth Model 9. Ke=.059 t=.3 (for purposes of demonstration) Kd=.063, V=$50.67B D=$6.15B E=$44.52B V=$50.67B Kwacc = Ke E V + Kd 1 t D V . 059 44.52B 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 10. 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= 2 = 10 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 1ga Kegn + DPS0 xH x gagn Kegn 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 11. 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: 1+ , 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) 1+ ; =.03, FCFE Growth=-0.0033516 8325.12 0.9966484 .057193 .03 = $305123.29 4) Find PV of Forever: 305123.29 1.057193 4 = $244263.31 Cash Flow Explanations 12. 5) Add all PV Cash Flows 7958.29 + 7503.34 + 7072.33 + 6664.59 + 244263.31 = $273461.86 6)0 = # = 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.) 13. Pro-Forma Using these factors, Stock price is actually undervalued, price 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 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 14. 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 Conclusions: 15. LMT Pro-Forma attached to Email, enjoy your move. Thank You for Your Time