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KLA-Tencor Corporation: Cash Flow Valuation

|Includes:KLA-Tencor Corporation (KLAC)

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

Morningstar.com

Yahoo! Finance

KLA-Tencor Corporation

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

Stocks: KLAC