Current Price: ~ $51/share

Projected Yield: ~ 2.74%

KLA-Tencor designs and manufactures yield-management and process-monitoring systems for the semiconductor industry. The systems are used to analyze the manufacturing process at various steps in a product's development. The firm's laser-scanning products are used for wafer qualification, process monitoring, and equipment monitoring. KLA-Tencor also provides systems for optical metrology and e-beam metrology.

Estimated WACC for the firm today is 16.47% 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 | 215 |

2003 | 112 |

2004 | 294 |

2005 | 447 |

2006 | 241 |

2007 | 527 |

2008 | 611 |

2009 | 173 |

2010 | 418 |

2011 | 772 |

TTM | 884 |

Average Annual Growth FCF: ~ 46%

CAGR FCF: ~ 15%

Consensus Forecast Industry 5-Year Growth: ~ 15% per year

Consensus Forecast Company 5-Year Growth: ~ 10% per year

Internal Growth Rate: ~ 17%

Sustainable Growth Rate: ~ 32%

**Scenario 1**

FCF for the 6 months ending December 31, 2011 is $379 million; $758 million annualized.

- Start at $758 million FCF
- Assume a 5-year growth rate in FCF of 10% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 758 |

1 | 834 |

2 | 917 |

3 | 1009 |

4 | 1110 |

5 | 1221 |

Terminal Value | 8151 |

The firm's future cash flows, discounted at a WACC of 16.47%, give a present value for the entire firm (Debt + Equity) of $7006 million. If the firm's fair value of debt is estimated at $871 million, then the fair value of the firm's equity could be $6135 million. $6135 million / 167 million outstanding shares is approximately $37 per share and a 20% margin of safety is $30/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 10% per year, then 6.50% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 758 |

1 | 834 |

2 | 917 |

3 | 1009 |

4 | 1110 |

5 | 1221 |

Terminal Value | 13464 |

- Present Value of the entire firm (Debt + Equity): $9484 million
- Value of Equity: $8613 million or $52/share
- 20% margin of safety is $42/share

**Scenario 3**

All else being equal,

- Discount the firm's future cash flows at a WACC of 12.50%
- 5-year growth rate in FCF of 10% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 758 |

1 | 834 |

2 | 917 |

3 | 1009 |

4 | 1110 |

5 | 1221 |

Terminal Value | 10743 |

- Present Value of the entire firm (Debt + Equity): $9506 million
- Value of Equity: $8635 million or $52/share
- 20% margin of safety is $42/share

Sources

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