Tuesday, July 17, 2012

Microchip Technology Inc: $MCHP Cash Flow Valuation Update


Current Price: ~ $32/share
Projected Yield: ~ 4.44%


Microchip became an independent company in 1989 when it was spun off from General Instrument. It is based in Chandler, Ariz., with production facilities in Arizona, Oregon, and Thailand. More than 80% of sales come from microcontrollers, which are used in a wide array of electronic devices from LCD displays to remote controls. The company has focused in recent years on lower-end eight-bit microcontrollers that are suitable for a wider range of less technologically advanced devices.      


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
2003
180
2004
280
2005
289
2006
361
2007
370
2008
377
2009
206
2010
404
2011
458
2012
334






Average Annual Growth FCF: ~ 14%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 15% per year
Consensus Forecast Company 5-Year Growth: ~ 13% per year
Internal Growth Rate: ~ 2%
Sustainable Growth Rate: ~ 3%

Scenario 1
Average FCF (2012, 2011, 2010) is $399
  • Start at $399 million FCF
  • Assume a 5-year growth rate in FCF of 13% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
399
1
451
2
509
3
576
4
651
5
735
Terminal Value
8020



The firm's future cash flows, discounted at a WACC of 10.36%, give a present value for the entire firm (Debt + Equity) of $7043 million. If the firm's fair value of debt is estimated at $1585 million, then the fair value of the firm's equity could be $5458 million.  $5458 million / 194 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 7% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
399
1
427
2
457
3
489
4
523
5
560
Terminal Value
9419


  • Present Value of the entire firm (Debt + Equity): $7574 million
  • Value of Equity: $5989 million or $31/share
  • 20% margin of safety is $25/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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