Current Price: ~ $51/share
Projected Yield: ~ 2.74%
KLA-Tencor designs and manufactures yield-management and process-monitoring systems for the semiconductor industry. The systems are used to analyze the manufacturing process at various steps in a product's development. The firm's laser-scanning products are used for wafer qualification, process monitoring, and equipment monitoring. KLA-Tencor also provides systems for optical metrology and e-beam metrology.
Estimated WACC for the firm today is 16.47% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Average Annual Growth FCF: ~ 46%
Year
|
FCF
$Millions
|
2002
|
215
|
2003
|
112
|
2004
|
294
|
2005
|
447
|
2006
|
241
|
2007
|
527
|
2008
|
611
|
2009
|
173
|
2010
|
418
|
2011
|
772
|
TTM
|
884
|
Average Annual Growth FCF: ~ 46%
CAGR FCF: ~ 15%
Consensus Forecast Industry 5-Year Growth: ~ 15% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
Internal Growth Rate: ~ 17%
Sustainable Growth Rate: ~ 32%
Scenario 1
FCF for the 6 months ending December 31, 2011 is $379 million; $758 million annualized.
- Start at $758 million FCF
- Assume a 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future cash flows, discounted at a WACC of 16.47%, give a present value for the entire firm (Debt + Equity) of $7006 million. If the firm's fair value of debt is estimated at $871 million, then the fair value of the firm's equity could be $6135 million. $6135 million / 167 million outstanding shares is approximately $37 per share and a 20% margin of safety is $30/share.
Year
|
FCF
$Millions
|
0
|
758
|
1
|
834
|
2
|
917
|
3
|
1009
|
4
|
1110
|
5
|
1221
|
Terminal
Value
|
8151
|
The firm's future cash flows, discounted at a WACC of 16.47%, give a present value for the entire firm (Debt + Equity) of $7006 million. If the firm's fair value of debt is estimated at $871 million, then the fair value of the firm's equity could be $6135 million. $6135 million / 167 million outstanding shares is approximately $37 per share and a 20% margin of safety is $30/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 10% per year, then 6.50% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
758
|
1
|
834
|
2
|
917
|
3
|
1009
|
4
|
1110
|
5
|
1221
|
Terminal
Value
|
13464
|
- Present Value of the entire firm (Debt + Equity): $9484 million
- Value of Equity: $8613 million or $52/share
- 20% margin of safety is $42/share
Scenario 3
All else being equal,
All else being equal,
- Discount the firm's future cash flows at a WACC of 12.50%
- 5-year growth rate in FCF of 10% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
758
|
1
|
834
|
2
|
917
|
3
|
1009
|
4
|
1110
|
5
|
1221
|
Terminal
Value
|
10743
|
- Present Value of the entire firm (Debt + Equity): $9506 million
- Value of Equity: $8635 million or $52/share
- 20% margin of safety is $42/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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