Microchip Technology Inc: $MCHP cash flow valuation

Current Price: ~ $38/share
Projected Yield: ~ 3.61%

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. Over 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 8-bit microcontrollers that are suitable for a wider range of less technologically advanced devices.

I estimated the firm's WACC today at 10.50% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2002	134
2003	180
2004	280
2005	289
2006	361
2007	370
2008	377
2009	206
2010	404
2011	458

Average Annual Growth FCF: ~ 21%

CAGR FCF: ~ 15%

Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 13% per year

Scenario 1

Starting at $458 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	458
1	518
2	585
3	661
4	747
5	844
Terminal Value	9078

The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $7959 million. If the firm's fair value of debt is estimated at $1574 million, then the fair value of the firm's equity could be $6385 million.  $6385 million / 190 million outstanding shares is approximately $34 per share and a 20% margin of safety is $27/share.

Scenario 2

Starting at $458 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and then a growth rate in FCF of 3% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	458
1	518
2	585
3	661
4	747
5	844
Terminal Value	12707

The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $10,162 million. If the firm's fair value of debt is estimated at $1574 million, then the fair value of the firm's equity could be $8588 million.  $8588 million / 190 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.

Sources

Morningstar.com

Yahoo! Finance

Microchip.com

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

Illinois Tool Works: $ITW cash flow valuation

Current Price: ~ $59/share
Projected Yield: ~ 2.30%

Illinois Tool Works' 840 operating units span 57 countries and generated $15.87 billion in revenue in 2010. Truly a diversified industrial operator, ITW garners about 18% of its business from general industrial markets; 19% from food and beverage service/preparation; 15% from automotive manufacturing and aftermarket; 10% from commercial construction; 12% from residential construction/renovation; 10% from primary metals, consumer durables, and electronics; and 16 % from other sources.

I estimated the firm's WACC today at 12.17% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2001	1094
2002	1017
2003	1110
2004	1249
2005	1553
2006	1765
2007	2131
2008	1867
2009	1899
2010	1275
TTM	1115

Average Annual Growth FCF: ~ 3%

CAGR FCF: ~ 2%

Consensus Forecast Industry 5-Year Growth: ~ 17% per year

Consensus Forecast Company 5-Year Growth: ~ 14% per year

Scenario 1

Average FCF in last three years is $1680 million.  Starting at $1680 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1680
1	1915
2	2183
3	2489
4	2837
5	3235
Terminal Value	30299

The firm's future cash flows, discounted at a WACC of 12.17%, give a present value for the entire firm (Debt + Equity) of $25,882 million. If the firm's fair value of debt is estimated at $3535 million, then the fair value of the firm's equity could be $22,347 million.  $22,347 million / 500 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.

Scenario 2

Starting at $1680 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% per year, and then a growth rate in FCF of 3.75% per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	1680
1	1915
2	2183
3	2489
4	2837
5	3235
Terminal Value	43792

The firm's future cash flows, discounted at a WACC of 12.17%, give a present value for the entire firm (Debt + Equity) of $33,480 million. If the firm's fair value of debt is estimated at $3535 million, then the fair value of the firm's equity could be $29,945 million.  $29,945 million / 500 million outstanding shares is approximately $60 per share and a 20% margin of safety is $48/share.

Sources

Morningstar.com

Yahoo! Finance

ITW.com

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

Bemis Company Inc: $BMS cash flow valuation

Current Price: ~ $34/share
Projected Yield: ~ 2.80%

Bemis manufactures flexible packaging materials primarily for the food packaging industry as well as for the health, hygiene and medical sectors. Additionally, Bemis develops pressure-sensitive materials used for labels, signage, and industrial applications. In 2010, Bemis completed its acquisition of Alcan's Food Americas business. This acquisition should boost Bemis' revenue by more than a third and increase its mix of revenue from food packaging.

I estimated the firm's WACC today at 7.91% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year	FCF $Millions
2001	200
2002	196
2003	299
2004	137
2005	93
2006	190
2007	227
2008	173
2009	387
2010	255
TTM	233

Average Annual Growth FCF: ~ 17%

CAGR FCF: ~ 3%

Consensus Forecast Industry 5-Year Growth: ~ 11% per year

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

Average FCF in last three years is $272 million.  Starting at $272 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	272
1	296
2	323
3	352
4	384
5	419
Terminal Value	5771

The firm's future cash flows, discounted at a WACC of 7.91%, give a present value for the entire firm (Debt + Equity) of $5347 million. If the firm's fair value of debt is estimated at $1521 million, then the fair value of the firm's equity could be $3826 million.  $3826 million / 105 million outstanding shares is approximately $36 per share and a 20% margin of safety is $29/share.

Sources

Morningstar.com

Yahoo! Finance

Bemis.com

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