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Applied Materials Inc: $AMAT Cash Flow Valuation

|Includes:Applied Materials, Inc. (AMAT)

Current Price: ~ $12/share
Projected Yield: ~ 2.65%

Applied Materials is the world's largest supplier of semiconductor manufacturing equipment. The firm's systems are used in the chemical vapor deposition, physical vapor deposition, and electroplating steps of the chip-fabrication process. Applied also supplies etching, chemical mechanical polishing, and wafer- and reticle-inspection systems, as well as critical-dimension measurement and defect-inspection scanning electron microscopes.

Estimated WACC for the firm today is 12.25% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2002 75
2003 536
2004 1437
2005 1047
2006 1756
2007 1945
2008 1423
2009 84
2010 1554
2011 2217
Click to enlarge

Average Annual Growth FCF: ~ 278%

CAGR FCF: ~ 46%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 9% per year

Internal Growth Rate: ~ 14%

Sustainable Growth Rate: ~ 23%

Scenario 1

The 5-year average FCF (2007-2011) is $1445 million. Starting at $1445 million FCF, assume the company achieves a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1445
1 1575
2 1717
3 1871
4 2040
5 2223
Terminal Value 19780
Click to enlarge

The firm's future cash flows, discounted at a WACC of 12.25%, give a present value for the entire firm (Debt + Equity) of $17719 million. If the firm's fair value of debt is estimated at $2200 million, then the fair value of the firm's equity could be $15519 million. $15519 million / 1310 million outstanding shares is approximately $12 per share and a 20% margin of safety is $10/share.

Scenario 2

The 4-year average FCF ex-2009 (2011, 2010, 2008) is $1731 million. Starting at $1731 million FCF, assume the company achieves a 5-year growth rate in FCF of 9% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 1731
1 1887
2 2057
3 2242
4 2443
5 2663
Terminal Value 23695
Click to enlarge

The firm's future cash flows, discounted at a WACC of 12.25%, give a present value for the entire firm (Debt + Equity) of $21227 million. If the firm's fair value of debt is estimated at $2200 million, then the fair value of the firm's equity could be $19027 million. $19027 million / 1310 million outstanding shares is approximately $15 per share and a 20% margin of safety is $12/share.

Sources

Morningstar.com

Yahoo! Finance

AppliedMaterials.com

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

Stocks: AMAT