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