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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: Cash Flow Valuation 0 comments
    Jan 31, 2012 2:29 AM | about stocks: ADI

    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

    Morningstar.com

    Yahoo! Finance

    Analog.com

    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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