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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • KLA-Tencor Corporation: Cash Flow Valuation Update 0 comments
    Aug 30, 2012 5:43 PM | about stocks: 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:

    YearFCF $Millions
    2003112
    2004294
    2005447
    2006241
    2007527
    2008611
    2009173
    2010418
    2011772
    2012884

    (click to enlarge)

    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

    YearFCF $Millions
    0691
    1760
    2836
    3920
    41012
    51113
    Terminal Value8433

    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

    YearFCF $Millions
    0691
    1760
    2836
    3920
    41012
    51113
    Terminal Value12863
    • 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
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