Current Price: ~ $38/share
Projected Yield: ~ 3.61%
Projected Yield: ~ 3.61%
Microchip became an independent company in 1989 when it was spun off from General Instrument. It is based in Chandler, Ariz., with production facilities in Arizona, Oregon, and Thailand. Over 80% of sales come from microcontrollers, which are used in a wide array of electronic devices from LCD displays to remote controls. The company has focused in recent years on lower-end 8-bit microcontrollers that are suitable for a wider range of less technologically advanced devices.
I estimated the firm's WACC today at 10.50% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and growth rates:
| Year | FCF $Millions |
| 2002 | 134 |
| 2003 | 180 |
| 2004 | 280 |
| 2005 | 289 |
| 2006 | 361 |
| 2007 | 370 |
| 2008 | 377 |
| 2009 | 206 |
| 2010 | 404 |
| 2011 | 458 |
Average Annual Growth FCF: ~ 21%
CAGR FCF: ~ 15%
Consensus Forecast Industry 5-Year Growth: ~ 16% per yearConsensus Forecast Company 5-Year Growth: ~ 13% per year
Scenario 1
Starting at $458 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 458 |
| 1 | 518 |
| 2 | 585 |
| 3 | 661 |
| 4 | 747 |
| 5 | 844 |
| Terminal Value | 9078 |
The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $7959 million. If the firm's fair value of debt is estimated at $1574 million, then the fair value of the firm's equity could be $6385 million. $6385 million / 190 million outstanding shares is approximately $34 per share and a 20% margin of safety is $27/share.
Scenario 2
Starting at $458 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and then a growth rate in FCF of 3% per year forever:
Discounted Cash Flow Valuation
| Year | FCF $Millions |
| 0 | 458 |
| 1 | 518 |
| 2 | 585 |
| 3 | 661 |
| 4 | 747 |
| 5 | 844 |
| Terminal Value | 12707 |
The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $10,162 million. If the firm's fair value of debt is estimated at $1574 million, then the fair value of the firm's equity could be $8588 million. $8588 million / 190 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.
Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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