Analog Devices Inc: $ADI Cash Flow Valuation Update

Current Price: ~ $50/share
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

• 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

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,

• 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

Morningstar.com

Yahoo! Finance

Analog Devices Inc

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

Analog Devices Inc: $ADI Cash Flow Valuation

Current Price: ~ $39/share
Projected Yield: ~ 2.56%



Analog Devices is a leading analog, mixed signal, and digital signal processing chipmaker. The firm has a significant market share lead in converter chips, which are used to translate analog signals to digital and vice versa. The company serves more than 60,000 customers, and more than half of its chip sales are made to industrial and automotive end markets. Analog Devices' chips are also incorporated in wireless base stations.         

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
2002	169
2003	365
2004	632
2005	587
2006	492
2007	679
2008	512
2009	376
2010	880
2011	778

Average Annual Growth FCF: ~ 31%

CAGR FCF: ~ 18%

Consensus Forecast Industry 5-Year Growth: ~ 26% per year

Consensus Forecast Company 5-Year Growth: ~ 9% per year

Internal Growth Rate: ~ 14%

Sustainable Growth Rate: ~ 20%

Scenario 1

Average FCF (2011, 2010, 2009) is $678 million.  Starting at $678 million FCF, assume the company achieves a 5-year growth rate in FCF of 9% per year then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	678
1	739
2	806
3	878
4	957
5	1043
Terminal Value	10972

The firm's future cash flows, discounted at a WACC of 10.36%, give a present value for the entire firm (Debt + Equity) of $9968 million. If the firm's fair value of debt is estimated at $887 million, then the fair value of the firm's equity could be $9081 million.  $9081 million / 298 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.

Scenario 2

All else being equal, start at $880 million FCF and assume the company achieves a 5-year growth rate in FCF of 9% per year then 2.5% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	880
1	959
2	1046
3	1140
4	1242
5	1354
Terminal Value	18770

The firm's future cash flows, discounted at a WACC of 10.36%, give a present value for the entire firm (Debt + Equity) of $15704 million. If the firm's fair value of debt is estimated at $887 million, then the fair value of the firm's equity could be $14817 million.  $14817 million / 298 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.

Sources

Morningstar.com

Yahoo! Finance

Analog.com

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