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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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  • Applied Materials Inc: $AMAT Cash Flow Valuation 0 comments
    Jan 31, 2012 1:09 AM | about stocks: 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

    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

    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

    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
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