Thursday, August 30, 2012

KLA-Tencor Corporation: $KLAC Cash Flow Valuation Update


Current Price: ~ $51/share
Yield: ~ 2.78%


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 14.52% 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
112
2004
294
2005
447
2006
241
2007
527
2008
611
2009
173
2010
418
2011
772
2012
884




Average Annual Growth FCF: ~ 52%
CAGR FCF: ~ 26%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year
Internal Growth Rate: ~ 12%
Sustainable Growth Rate: ~ 20%

Scenario 1
Average FCF (2012, 2011, 2010) is $691 million
  • Start at $691 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
691
1
760
2
836
3
920
4
1012
5
1113
Terminal Value
8433


The firm's future free cash flows, discounted at a WACC of 14.52%, give a present value for the entire firm (Debt + Equity) of $7349 million. If the firm's fair value of debt is estimated at $902 million, then the fair value of the firm's equity could be $6447 million.  $6447 million / 167 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.


Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 10% per year, then 5% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
691
1
760
2
836
3
920
4
1012
5
1113
Terminal Value
12863


  • Present Value of the entire firm (Debt + Equity): $9598 million
  • Value of Equity: $8696 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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