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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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  • Closing Out Applied Materials Inc: AMAT Cash Flow Valuation Update 0 comments
    Dec 16, 2013 3:58 PM | about stocks: AMAT

    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

    (click to enlarge)

    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

    Morningstar.com

    Yahoo! Finance

    Applied Materials, Inc.

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

    Stocks: AMAT
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