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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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  • KLA-Tencor Corporation: Cash Flow Valuation 0 comments
    Feb 8, 2012 5:59 PM | about stocks: 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
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