Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Analog Devices Inc: ADI Cash Flow Valuation Update

|Includes:Analog Devices Inc. (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:

Year FCF $Millions
2004 632
2005 587
2006 492
2007 679
2008 512
2009 376
2010 880
2011 778
2012 682
2013 789

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

Year FCF $Millions
0 750
1 833
2 924
3 1026
4 1139
5 1264
Terminal Value 10847

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

Year FCF $Millions
0 750
1 833
2 924
3 1026
4 1139
5 1264
Terminal Value 23647
  • 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