Current Price: ~ $39/share

Projected Yield: ~ 2.56%

Analog Devices is a leading analog, mixed signal, and digital signal processing chipmaker. The firm has a significant market share lead in converter chips, which are used to translate analog signals to digital and vice versa. The company serves more than 60,000 customers, and more than half of its chip sales are made to industrial and automotive end markets. Analog Devices' chips are also incorporated in wireless base stations.

Estimated WACC for the firm today is 10.36% 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 | 169 |

2003 | 365 |

2004 | 632 |

2005 | 587 |

2006 | 492 |

2007 | 679 |

2008 | 512 |

2009 | 376 |

2010 | 880 |

2011 | 778 |

Average Annual Growth FCF: ~ 31%

CAGR FCF: ~ 18%

Consensus Forecast Industry 5-Year Growth: ~ 26% per year

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

Internal Growth Rate: ~ 14%

Sustainable Growth Rate: ~ 20%

**Scenario 1**

Average FCF (2011, 2010, 2009) is $678 million. Starting at $678 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 | 678 |

1 | 739 |

2 | 806 |

3 | 878 |

4 | 957 |

5 | 1043 |

Terminal Value | 10972 |

The firm's future cash flows, discounted at a WACC of 10.36%, give a present value for the entire firm (Debt + Equity) of $9968 million. If the firm's fair value of debt is estimated at $887 million, then the fair value of the firm's equity could be $9081 million. $9081 million / 298 million outstanding shares is approximately $30 per share and a 20% margin of safety is $24/share.

**Scenario 2**

All else being equal, start at $880 million FCF and assume the company achieves a 5-year growth rate in FCF of 9% per year then 2.5% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 880 |

1 | 959 |

2 | 1046 |

3 | 1140 |

4 | 1242 |

5 | 1354 |

Terminal Value | 18770 |

The firm's future cash flows, discounted at a WACC of 10.36%, give a present value for the entire firm (Debt + Equity) of $15704 million. If the firm's fair value of debt is estimated at $887 million, then the fair value of the firm's equity could be $14817 million. $14817 million / 298 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.

Sources

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