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KLA-Tencor Corporation: Cash Flow Valuation Update

|Includes:KLA-Tencor Corporation (KLAC)

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

Morningstar.com

Yahoo! Finance

KLA-Tencor.com

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

Stocks: KLAC