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.
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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