Open main menu
Home
Random
Donate
Recent changes
Special pages
Community portal
Preferences
About Stockhub
Disclaimers
Search
User menu
Talk
Contributions
Create account
Log in
Editing
BAE Systems plc
(section)
Warning:
You are not logged in. Your IP address will be publicly visible if you make any edits. If you
log in
or
create an account
, your edits will be attributed to your username, along with other benefits.
Anti-spam check. Do
not
fill this in!
=== Intrinsic Valuation (DCF) === ==== Expected Return on Investment ==== The Stockhub users estimate that the expected return of an investment in BAE Systems plc over the next five years is '''31%'''. This value was arrived at through the use of an intrinsic valuation in the form of a discounted cash flow model. Assuming that a suitable return level of five years is 10% per year (based of the S&P 500 returns) and BAE Systems achieves its return level of '''31%''', then the company can be considered as '''undervalued'''. ==== Assumptions ==== {| class="wikitable" !Description !Value !Commentary |- |Valuation Model |Discounted Cash Flow Model |One form of intrinsic valuation is the discounted cash flow model where future cash flows are discounted to the present value. Research has suggested that to estimate the expected return of an investment over a long-term investment horizon, a discounted cash flow model provides an accurate projection. |- |Financial Projections |Stockhub, CapitalIQ, Yahoo Finance |To improve the reliability of financial projections, a mixture of sources was used when projecting key financial metrics such as revenue. |- |Discount Rate |WACC |The weighted average cost of capital was used as the discount rate as it expresses the return that both bondholders and shareholders demand to provide the company with capital. The cost of equity and cost of debt have been calculated in the tables provided below using values taken from the company's financial statements, beta for the stock, and expected market returns. |} ==== Free cashflow calculation ==== {| class="wikitable" | colspan="14" |Current Share Price: '''£9.68''' |- !''£ million'' ! colspan="8" |''Historical'' ! colspan="5" |''Projected'' |- ! !2015 !2016 !2017 !2018 !2019 !2020 !2021 !2022 !2023 !2024 !2025 !2026 !2027 |- ! colspan="14" |Income Statement |- |Revenue |16787 |17790 |17224 |16821 |18305 |19277 |19521 |21258 |24688 |26076 |27735 |28967 |29832 |- |''% growth'' | |6% | -3% | -2% |9% |5% |1% |9% |16% |6% |6% |4% |3% |- | | | | | | | | | | | | | | |- |Cost Of Goods Sold |7101 |7212 |6085 |5923 |6502 |6864 |7053 |7195 |8708 |9198 |9783 |10218 |10523 |- |''% of revenue'' |42% |41% |35% |35% |36% |36% |36% |34% |35% |35% |35% |35% |35% |- | | | | | | | | | | | | | | |- |Gross Profit |9686 |10578 |11139 |10898 |11803 |12413 |12468 |14063 |15980 |16878 |17952 |18749 |19309 |- |''gross margin'' |58% |59% |65% |65% |64% |64% |64% |66% |65% |65% |65% |65% |65% |- | | | | | | | | | | | | | | |- |Selling General & Admin Exp. |5200 |5838 |6229 |6203 |6457 |6681 |6640 |7431 |8509 |8988 |9559 |9984 |10282 |- |''% of revenue'' |31% |33% |36% |37% |35% |35% |34% |35% |34% |34% |34% |34% |34% |- | | | | | | | | | | | | | | |- |Depreciation & Amort. |351 |333 |263 |269 |511 |543 |513 |549 |553 |584 |621 |648 |668 |- |''% of revenue'' |2% |2% |2% |2% |3% |3% |3% |3% |2% |2% |2% |2% |2% |- | | | | | | | | | | | | | | |- |Amort. Of Goodwill and Intangibles |0 |0 |82 |78 |101 |128 |188 |215 |272 |313 |361 |406 |447 |- |''% of revenue'' |0% |0% |0% |0% |1% |1% |1% |1% |1% |1% |1% |1% |2% |- | | | | | | | | | | | | | | |- |Other Operating Expense |2872 |2929 |3032 |2821 |3087 |3348 |3283 |3786 |4222 |4459 |4743 |4954 |5101 |- |''% of revenue'' |17% |16% |18% |17% |17% |17% |17% |18% |17% |17% |17% |17% |17% |- | | | | | | | | | | | | | | |- |Total Operating Expenses |8072 |8767 |9261 |9024 |9544 |10029 |9923 |11217 |12731 |13447 |14302 |14938 |15384 |- | | | | | | | | | | | | | | |- |Operating Income/ EBIT |1263 |1478 |1533 |1527 |1647 |1713 |1844 |2082 |2424 |2534 |2668 |2758 |2810 |- | | | | | | | | | | | | | | |- |EBITDA |1614 |1811 |1878 |1874 |2259 |2384 |2545 |2846 |3248 |3431 |3649 |3811 |3925 |- | | | | | | | | | | | | | | |- |Tax Expense |147 |213 |216 |191 |94 |225 |198 |315 |295 |308 |325 |336 |342 |- |''Effective tax rate'' |12% |14% |14% |13% |6% |13% |11% |15% |12% |12% |12% |12% |12% |- | | | | | | | | | | | | | | |- |EBIAT |1116 |1265 |1317 |1336 |1553 |1488 |1646 |1767 |2129 |2226 |2343 |2422 |2468 |- | | | | | | | | | | | | | | |- ! colspan="14" |Cashflow |- |D&A |351 |333 |263 |269 |511 |543 |513 |549 |553 |584 |621 |648 |668 |- |''% of revenue'' |2% |2% |2% |2% |3% |3% |3% |3% |2% |2% |2% |2% |2% |- | | | | | | | | | | | | | | |- |Amort. Of Goodwill and Intangibles |0 |0 |82 |78 |101 |128 |188 |215 |272 |313 |361 |406 |447 |- |''% of revenue'' |0% |0% |0% |0% |1% |1% |1% |1% |1% |1% |1% |1% |2% |- | | | | | | | | | | | | | | |- |Capital Expenditure | -359 | -408 | -389 | -358 | -360 | -385 | -516 | -599 | -741 | -782 | -832 | -869 | -895 |- |''% of revenue'' |2% |2% |2% |2% |2% |2% |3% |3% |3% |3% |3% |3% |3% |- | | | | | | | | | | | | | | |- |Change in NWC |717 |108 |640 |192 |422 | -196 | -95 |132 |521 |550 |585 |611 |630 |- |% of revenue |4% |1% |4% |1% |2% | -1% |0% |1% |2% |2% |2% |2% |2% |- | | | | | | | | | | | | | | |- |'''Unlevered FCF''' |391 |1082 |633 |1133 |1383 |1970 |1926 |1800 |'''1692''' |'''1790''' |'''1907''' |'''1996''' |'''2059''' |} ==== Notes on projections ==== Revenue projections were adapted from Capital IQ's estimates, and cross-checked with Yahoo Finance. The COGS margin was projected by taking the average of COGS margins from 2017 onwards, as there seems to have been a stabilisation after this year. The Selling General & Admin Expenses, Depreciation and Amortisation, Other Operating Expenses and the Tax Expenses were projected by applying average of each respective margin over the historical period and applying it to each forecast year. Amortisation of Goodwill and Intangibles was projected as growing from 1.1% to 1.5% to model the steady increase in its margin seen in the historical period. * <small>Note: Upon cross-check with BAE System's Annual Report, Capital IQ presents the true depreciation expense as "Depreciation and Amortisation", and the true Amortisation Expense as "Amortisation of Goodwill and Intangibles".</small> Capital Expenditure was taken as having a steady 3% margin, seen from the recent step up in its value (2021, 2022) Change in NWC was projected by taking the average of the non-negative margins from the historical data, and applying this average as the margin for each forecast year. ==== Calculation of the discount rate (WACC) ==== {| class="wikitable" !WACC ! !Notes |- |'''Weights''' | | |- |Total Debt |6610 | |- |Market Cap |29363 | |- |Total |35973 | |- |Wd |18% |Weight of debt calculated as the total debt as a proportion of total capital. |- |We |82% |Weight of equity calculated as the market cap as a proportion of total capital |- | | | |- |'''Debt''' | | |- |Total Debt |6610 |Cost of debt was calculated by taking interest expenses from the income statement and dividing this by the total debt making note of the fact that debt is a tax deductable item. |- |Interest Expense | -233 | |- |Rate |3.5% | |- |Effective Tax Rate |12% | |- |Rd(1-t) |3.1% | |- | | | |- |'''Equity''' | | |- |Risk Free Rate |4.05% |Capital asset pricing model was used to calculate the cost of equity. Risk free rate of the US Treasury 10 Year was used. |- |Beta |0.57 |Beta for the stock was found from Yahoo Finance |- |Market Rate |10% |Current market rate was calculated as the average returns of the S&P 500 over the past 50 years. |- |Re |7.4% | |- | | | |- |'''Discount Rate''' |'''6.6%''' |This is the value used for the WACC |- |'''Perpetuity Growth Rate''' |'''2.0%''' |A perpetuity growth rate of 2% was used as this is sufficiently low to ensure that the company is not projected to increase in size far faster than the global economy in the very long term. |} ==== Cashflow projection ==== {| class="wikitable" ! colspan="2" rowspan="2" |£ millions !2023 !2024 !2025 !2026 !2027 !Terminal Value (Perpetuity Growth) !Notes |- | rowspan="2" |1692 | rowspan="2" |1790 | rowspan="2" |1907 | rowspan="2" |1996 | rowspan="2" |2059 | rowspan="2" |45229 | rowspan="2" |The terminal value of the company was calculated using the Gordon Growth Model.<ref>https://www.investopedia.com/terms/t/terminalvalue.asp</ref> |} ==== DCF ==== {| class="wikitable" !Present Value of FCF |7769 |- !Terminal Value |45229 |- !Net Present Value of TV |32791 |- !Enterprise Value |40559 |- !Net Debt |1866 |- !Equity Value |38693 |- !Shares Out |3050 |- !'''Equity Value per Share''' |'''£12.69''' |- !'''Current share price''' |'''£9.68''' |- !''Difference'' |''31%'' |} ==== Sensitivity Analysis ==== A sensitivity analysis was also conducted to reflect how changes in the discount rate and perpetuity growth rate would affect the intrinsic value of the company. {| class="wikitable" ! colspan="2" rowspan="2" |£12.69 ! colspan="5" |Perpetuity Growth |- !1.0% !1.5% !2.0% !2.5% !3.0% |- ! rowspan="7" |WACC !5.5% |£13.61 |£15.12 |£17.07 |£19.66 |£23.30 |- !6.0% |£12.17 |£13.36 |£14.84 |£16.75 |£19.30 |- !6.5% |£10.99 |£11.95 |£13.11 |£14.57 |£16.44 |- !6.6% |£10.69 |£11.59 |'''£12.69''' |£14.04 |£15.77 |- !7.0% |£10.01 |£10.79 |£11.73 |£12.87 |£14.30 |- !7.5% |£9.18 |£9.83 |£10.60 |£11.51 |£12.64 |- !8.0% |£8.47 |£9.02 |£9.65 |£10.40 |£11.31 |}
Summary:
Please note that all contributions to Stockhub may be edited, altered, or removed by other contributors. If you do not want your writing to be edited mercilessly, then do not submit it here.
You are also promising us that you wrote this yourself, or copied it from a public domain or similar free resource (see
Stockhub:Copyrights
for details).
Do not submit copyrighted work without permission!
Cancel
Editing help
(opens in new window)