Monday, December 16, 2013

Closing Out Applied Materials Inc: $AMAT Cash Flow Valuation Update

Current Price: ~ $17/share
Yield: ~ 2.34%


Applied Materials, Inc., provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic and related industries.


        
          

Estimated WACC for the firm today is 17.31% 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
1437
2005
1047
2006
1756
2007
1945
2008
1423
2009
84
2010
1554
2011
2217
2012
1689
2013
426



Average Annual Growth FCF: ~ 180.5%
CAGR FCF: ~ -12.64%
Consensus Forecast Industry 5-Year Growth: ~ 17% per year
Consensus Forecast Company 5-Year Growth: ~ 8% per year
Internal Growth Rate: ~ -1.7%
Sustainable Growth Rate: ~ -2.81%

Scenario 1
Average FCF (2013-2011) is $1444 million
  • Start at $1444 million FCF
  • Assume a 5-year growth rate in FCF of 8% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1444
1
1560
2
1684
3
1819
4
1965
5
2122
Terminal Value
13235

The firm's future free cash flows, discounted at a WACC of 17.31%, give a present value for the entire firm (Debt + Equity) of $11629 million. If the firm's fair value of debt is estimated at $2100 million, then the fair value of the firm's equity could be $9529 million.  $9529 million / 1200 million outstanding shares is approximately $8 per share and a 20% margin of safety is $6.40/share.

Scenario 2
All else being equal,
  • Assume a 5-year growth rate in FCF of 12.00% per year, then 9.50% growth in FCF per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1444
1
1617
2
1811
3
2029
4
2272
5
2545
Terminal Value
36480
  • Present Value of the entire firm (Debt + Equity): $22715 million
  • Value of Equity: $20615 million or $17/share
  • 20% margin of safety is $13.60/share


Conclusion: Closing out position in AMAT for my Fantasy Portfolio today.

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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