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Aerospace and Defense Industry

Aerospace and Defense Industry. Devin Sheehan Tyler Saucedo Alex Aponte. Industry Background. Customers U.S. Gov NATO Allies Products Tactical Fighters Missiles Security Systems Companies Lockheed Martin Northrop Grumman Raytheon. Customer’s Budget.

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Aerospace and Defense Industry

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  1. Aerospace and Defense Industry Devin Sheehan Tyler Saucedo Alex Aponte

  2. Industry Background • Customers • U.S. Gov • NATO Allies • Products • Tactical Fighters • Missiles • Security Systems • Companies • Lockheed Martin • Northrop Grumman • Raytheon

  3. Customer’s Budget

  4. International Customers: F-35

  5. Products • http://www.youtube.com/watch?v=Kshe7-BYfWc&t=35s&end=75 • https://www.youtube.com/watch?v=-UpxsrlLbpU&t=26s

  6. Companies

  7. Why the Pop? • International sales • Global defense spending increased from $1.538T to$1.547T, first increase since 2009. • Stronger margins abroad. • Pensions… • CAS (U.S. Gov Cost Accounting Standards) Pension Harmonization Rule. • Went into effect in 2013.

  8. LMT: 10-K 2013

  9. Valuation- Projections: LMT

  10. Valuation - Discount Rate: LMT • Stable, Mature Company • Low Debt to Equity • Backlog of $82.6B • 7.19%

  11. Profitability Map - LMT

  12. Valuation- Sensitivity Analysis : LMT

  13. Valuation- Projections: NOC

  14. NOC – Cost of Debt • Cost of debt between calculation and Bloomberg was very comparable • Bloomberg expecting greater return on market than 8.67% • Used CAPM approach

  15. Profitability Map-NOC

  16. Valuation- Sensitivity Analysis : NOC • Market Cap: $25.68 Billion

  17. Valuation- Projections: RTN

  18. Valuation- Discount Rate: RTN • Reflects time value of money and risk of investing in enterprise operations • Risks Specific to Raytheon: • International Sales (Int’l Traffics and Arms Regulations) • Innovation • Goodwill Impairment (over 50% of total assets) • WACC estimate: 7.44%

  19. Profitability -RTN

  20. Valuation- Sensitivity Analysis : RTN • Market Value: $29.85 Billion

  21. Assumptions - Inventory • Increasing for LMT and NOC due to delays on the F-35 project. • Stable for RTN

  22. Assumptions – Pensions • CAS creates standards for U.S. Government Accounting as it relates to contracting. • Pension Harmonization Rule does not allow defense contractor pensions to be underfunded and requires the government to make up the difference. • Currently 30-40% underfunded • Huge jump in cash flows and EPM over the horizon.

  23. Assumptions – Cost of Sales • Decreasing • Margin Expansion • International Sales • Pensions

  24. Industry Assumption – Income Taxes • Deferred tax assets a result of steep increase in pension obligations • Taxes forecasted to increase as a result of improved operating margins year over year • Growth projected in forecasted international sales will also drive up income tax expenses as foreign income is subject to additional taxation outside U.S.

  25. Conclusion - Recommendations • Lockheed Martin – BUY • Northrop Grumman – BUY • Raytheon Company - BUY

  26. Questions?

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