Yield: ~ 2.74%
Analog Devices Inc is engaged in the design, manufacture and marketing of a portfolio of high-performance analog, mixed-signal and digital signal processing integrated circuits used in virtually all types of electronic equipment.
Estimated WACC for the firm today is 12.93% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year
|
FCF $Millions
|
2004
|
632
|
2005
|
587
|
2006
|
492
|
2007
|
679
|
2008
|
512
|
2009
|
376
|
2010
|
880
|
2011
|
778
|
2012
|
682
|
2013
|
789
|
Average Annual Growth FCF: ~ 10%
CAGR FCF: ~ 2.5%
Consensus Forecast Industry 5-Year Growth: ~ 24.6% per year
Consensus Forecast Company 5-Year Growth: ~ 11% per year
Internal Growth Rate: ~ 4.5%
Sustainable Growth Rate: ~ 6%
Scenario 1
Average FCF (2013 - 2011) is $750 million
Average FCF (2013 - 2011) is $750 million
- Start at $750 million FCF
- Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future free cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $9467 million. If the firm's fair value of debt is estimated at $872 million, then the fair value of the firm's equity could be $8595 million. $8595 million / 311 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.
Year
|
FCF $Millions
|
0
|
750
|
1
|
833
|
2
|
924
|
3
|
1026
|
4
|
1139
|
5
|
1264
|
Terminal Value
|
10847
|
The firm's future free cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $9467 million. If the firm's fair value of debt is estimated at $872 million, then the fair value of the firm's equity could be $8595 million. $8595 million / 311 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 11% per year, then 7% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF $Millions
|
0
|
750
|
1
|
833
|
2
|
924
|
3
|
1026
|
4
|
1139
|
5
|
1264
|
Terminal Value
|
23647
|
- Present Value of the entire firm (Debt + Equity): $16435 million
- Value of Equity: $15563 million or $50/share
- 20% margin of safety is $40/share
Sources
Disclosure: I have no real positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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