Monday, January 30, 2012

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.

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