Elbit Systems - Company Valuation

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Ilit
 Raz
 

EMBA
 –
 Dickens
 Cohort
 

Jan
 2013
 

Company Valuation - Elbit Systems Ltd.
The following document will try to describe the financial assets and the portfolio of “Elbit Systems” and a company valuation. As part of my military service I spend some time in different project in Elbit Systems, working with their R&D department. For the company valuation I’ll use Discount Cash Flow (DCF) method. After valuating the company I’ll calculate the discount premium rates that can serve investors and be a supportive tool for their decision.

Company Background
“Elbit Systems” develops, manufactures and integrates advanced, highperformance defense electronic and electro-optic systems for customers throughout the world. The Company focuses on designing, developing, manufacturing and integrating command, control, communication, computer, intelligence, surveillance and reconnaissance (C ISR) network centric systems, including unmanned vehicles, for defense and homeland security applications. They also perform upgrade programs for airborne, land and naval defense platforms. Moreover, they develop and manufacture systems and aero structures for the commercial aviation market. They also provide a range of support services. The company based in Haifa, Israel and currently has 12,500 employees around the world mainly in the US. Elbit’s stock is traded in both TASE (Tel Aviv Stock Exchange) and the NASDAQ as ESLT. 4

Elbit Systems has an average risk level, which mainly affected by geopolitical risks that can affect the company sales, security budget in major markets such as Israel and the US.

Ilit
 Raz
 

EMBA
 –
 Dickens
 Cohort
 

Jan
 2013
 

Discount Cash Flow (DCF)
Valuation using discounted cash flows is a method for determining the current value of a company using future cash flows adjusted for time value. The future cash flow set is made up of the cash flows within the determined forecast period and a continuing value that represents the cash flow stream after the forecast period. Company / Firm value, using the DCF method, is calculated with the following formula: Value of the Firm = Enterprise Value=

Where: FCFF = Free Cash Flow to the Firm WACC = Weighted Average Cost of Capital t = Time period n = Number of time periods WACC Calculation

g = Growth Rate

WACC = Cost of Equity (CAPM) * Common Equity + (Cost of Debt) * Total Debt

Ilit
 Raz
  FCFF Calculation

EMBA
 –
 Dickens
 Cohort
 

Jan
 2013
 

FCFF = NOPAT + D&A – Capitalization Expenditure – WC Investments * NOPAT = Net Operating Profit - Taxes

I’ll first calculate the firm NOPAT (Figure 2) in order to calculate the FCFF of the firm. (Figure 3)  
  2012
  2013
  2014
  2015
  2016
  Operating
  143
  149
  155
  161
  168
  Profit
  Taxes
  21
  22
  23
  23
  24
  NOPAT
  122
  127
  132
  138
  144
  Figure 2 – NOPAT Calculation for the Years 2012-2016 (in Millions of USD)

 
  2012
  NOPAT
  122
  D&A
  155
  Cap.
 Ex.
  138
  WC
  6
  Investments
  FCFF
  133
  Figure 3 – FCFF Calculation

2013
  127
  159
  143
  6
 

2014
  132
  163
  149
  6
 

2015
  138
  167
  155
  6
 

2016
  144
  171
  161
  7
 

137
  140
  144
  147
  for the Years 2012-2016 (in Millions of USD)

Ilit
 Raz
 

EMBA
 –
 Dickens
 Cohort
 

Jan
 2013
 

Enterprise Value Calculations Using the WACC and the FCFF we calculated, we can now compute their PV values and sum. Adding to that sum the terminal value will give us the Enterprise Value. WACC  

 
  Counter
 for
 PV
  FCFF
  PV
 of
 FCFF
 
 
 
 
 
 
  2012
  1
  133
  122
 
  2013
  2
  137
  115
 ...
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