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Closing Out Applied Materials Inc: AMAT Cash Flow Valuation Update

|Includes:Applied Materials, Inc. (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

(click to enlarge)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
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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
Click to enlarge
  • 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