Monday, January 30, 2012

Analog Devices Inc: $ADI Cash Flow Valuation


Current Price: ~ $39/share
Projected Yield: ~ 2.56%




Analog Devices is a leading analog, mixed signal, and digital signal processing chipmaker. The firm has a significant market share lead in converter chips, which are used to translate analog signals to digital and vice versa. The company serves more than 60,000 customers, and more than half of its chip sales are made to industrial and automotive end markets. Analog Devices' chips are also incorporated in wireless base stations.         


Estimated WACC for the firm today is 10.36% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2002
169
2003
365
2004
632
2005
587
2006
492
2007
679
2008
512
2009
376
2010
880
2011
778


Average Annual Growth FCF: ~ 31%
CAGR FCF: ~ 18%
Consensus Forecast Industry 5-Year Growth: ~ 26% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
Internal Growth Rate: ~ 14%
Sustainable Growth Rate: ~ 20%

Scenario 1
Average FCF (2011, 2010, 2009) is $678 million.  Starting at $678 million FCF, assume the company achieves a 5-year growth rate in FCF of 9% per year then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
678
1
739
2
806
3
878
4
957
5
1043
Terminal Value
10972


The firm's future cash flows, discounted at a WACC of 10.36%, give a present value for the entire firm (Debt + Equity) of $9968 million. If the firm's fair value of debt is estimated at $887 million, then the fair value of the firm's equity could be $9081 million.  $9081 million / 298 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.


Scenario 2
All else being equal, start at $880 million FCF and assume the company achieves a 5-year growth rate in FCF of 9% per year then 2.5% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
880
1
959
2
1046
3
1140
4
1242
5
1354
Terminal Value
18770


The firm's future cash flows, discounted at a WACC of 10.36%, give a present value for the entire firm (Debt + Equity) of $15704 million. If the firm's fair value of debt is estimated at $887 million, then the fair value of the firm's equity could be $14817 million.  $14817 million / 298 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.


Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Applied Materials Inc: $AMAT Cash Flow Valuation


Current Price: ~ $12/share
Projected Yield: ~ 2.65%




Applied Materials is the world's largest supplier of semiconductor manufacturing equipment. The firm's systems are used in the chemical vapor deposition, physical vapor deposition, and electroplating steps of the chip-fabrication process. Applied also supplies etching, chemical mechanical polishing, and wafer- and reticle-inspection systems, as well as critical-dimension measurement and defect-inspection scanning electron microscopes.         


Estimated WACC for the firm today is 12.25% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2002
75
2003
536
2004
1437
2005
1047
2006
1756
2007
1945
2008
1423
2009
84
2010
1554
2011
2217


Average Annual Growth FCF: ~ 278%
CAGR FCF: ~ 46%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
Internal Growth Rate: ~ 14%
Sustainable Growth Rate: ~ 23%

Scenario 1

The 5-year average FCF (2007-2011) is $1445 million.  Starting at $1445 million FCF, assume the company achieves a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
1445
1
1575
2
1717
3
1871
4
2040
5
2223
Terminal Value
19780


The firm's future cash flows, discounted at a WACC of 12.25%, give a present value for the entire firm (Debt + Equity) of $17719 million. If the firm's fair value of debt is estimated at $2200 million, then the fair value of the firm's equity could be $15519 million.  $15519 million / 1310 million outstanding shares is approximately $12 per share and a 20% margin of safety is $10/share.


Scenario 2

The 4-year average FCF ex-2009 (2011, 2010, 2008) is $1731 million.  Starting at $1731 million FCF, assume the company achieves a 5-year growth rate in FCF of 9% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
1731
1
1887
2
2057
3
2242
4
2443
5
2663
Terminal Value
23695


The firm's future cash flows, discounted at a WACC of 12.25%, give a present value for the entire firm (Debt + Equity) of $21227 million. If the firm's fair value of debt is estimated at $2200 million, then the fair value of the firm's equity could be $19027 million.  $19027 million / 1310 million outstanding shares is approximately $15 per share and a 20% margin of safety is $12/share.


Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Sunday, January 29, 2012

Walgreen Co: $WAG Cash Flow Valuation


Current Price: ~ $34/share
Projected Yield: ~ 2.63%




Walgreen is the nation's largest retail pharmacy, with about 7,800 drugstores located throughout the United States. Prescription drugs account for about two thirds of sales, with most of the rest attributable to nonprescription drugs and convenience items such as packaged foods, greeting cards, photofinishing, and household and personal-care products. The company also operates in-store and work-site health clinics.         


Estimated WACC for the firm today is 10.58% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2002
539
2003
696
2004
713
2005
134
2006
1102
2007
571
2008
814
2009
2184
2010
2730
2011
2430
TTM
1928


Average Annual Growth FCF: ~ 94%
CAGR FCF: ~ 18%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
Internal Growth Rate: ~ 8%
Sustainable Growth Rate: ~ 16%

Starting at $2430 million FCF, assume the company achieves a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
2430
1
2649
2
2887
3
3147
4
3430
5
3739
Terminal Value
38505


The firm's future cash flows, discounted at a WACC of 10.58%, give a present value for the entire firm (Debt + Equity) of $34922 million. If the firm's fair value of debt is estimated at $2626 million, then the fair value of the firm's equity could be $32296 million.  $32296 million / 874 million outstanding shares is approximately $37 per share and a 20% margin of safety is $30/share.


Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.