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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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  • Analog Devices Inc: ADI Cash Flow Valuation Update 0 comments
    Jan 9, 2014 3:52 PM | about stocks: ADI

    Current Price: ~ $50/share
    Yield: ~ 2.74%

    Analog Devices Inc is engaged in the design, manufacture and marketing of a portfolio of high-performance analog, mixed-signal and digital signal processing integrated circuits used in virtually all types of electronic equipment.

    Estimated WACC for the firm today is 12.93% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2004632
    2005587
    2006492
    2007679
    2008512
    2009376
    2010880
    2011778
    2012682
    2013789

    Average Annual Growth FCF: ~ 10%

    CAGR FCF: ~ 2.5%
    Consensus Forecast Industry 5-Year Growth: ~ 24.6% per year

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

    Internal Growth Rate: ~ 4.5%

    Sustainable Growth Rate: ~ 6%

    Scenario 1
    Average FCF (2013 - 2011) is $750 million

    • Start at $750 million FCF
    • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0750
    1833
    2924
    31026
    41139
    51264
    Terminal Value10847

    The firm's future free cash flows, discounted at a WACC of 12.93%, give a present value for the entire firm (Debt + Equity) of $9467 million. If the firm's fair value of debt is estimated at $872 million, then the fair value of the firm's equity could be $8595 million. $8595 million / 311 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 11% per year, then 7% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0750
    1833
    2924
    31026
    41139
    51264
    Terminal Value23647
    • Present Value of the entire firm (Debt + Equity): $16435 million
    • Value of Equity: $15563 million or $50/share
    • 20% margin of safety is $40/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Analog Devices Inc

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

    Stocks: ADI
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