Linear Technology: $LLTC Cash Flow Valuation

Current Price: ~ $34/share
Projected Yield: ~ 2.93%



Linear Technology designs and manufactures standard high-performance analog integrated circuits for a diverse customer base spanning industrial, automotive, communications, and high-end consumer electronics. The firm offers thousands of analog products to more than 15,000 original equipment manufacturers globally. Most of its products support functions like power management, data interface, and conversion. International markets account for the lion's share of Linear's revenue.          

Estimated WACC for the firm today is 10.24% 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	239
2003	278
2004	437
2005	431
2006	441
2007	416
2008	495
2009	377
2010	454
2011	551
TTM	549

Average Annual Growth FCF: ~ 12%

CAGR FCF: ~ 10%

Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 10% per year

Scenario 1

3-year average FCF (2011, 2010, 2009) is $461 million

• Start at $461 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

Year	FCF $Millions
0	461
1	507
2	558
3	614
4	675
5	742
Terminal Value	7974

The firm's future cash flows, discounted at a WACC of 10.24%, give a present value for the entire firm (Debt + Equity) of $7187 million. If the firm's fair value of debt is estimated at $845 million, then the fair value of the firm's equity could be $6342 million.  $6342 million / 229 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 10% per year, then 2.5% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	461
1	507
2	558
3	614
4	675
5	742
Terminal Value	10548

• Present Value of the entire firm (Debt + Equity): $8768 million
• Value of Equity: $7923 million or $35/share
• 20% margin of safety is $28/share

Scenario 3
All else being equal,

• Start at $551 million FCF
• assume 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	551
1	606
2	667
3	733
4	807
5	887
Terminal Value	9530

• Present Value of the entire firm (Debt + Equity): $8590 million
• Value of Equity: $7745 million or $34/share
• 20% margin of safety is $27/share

Sources

Morningstar.com

Yahoo! Finance

Linear Technology

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