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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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  • Texas Instruments Inc: Cash Flow Valuation Update 0 comments
    Mar 26, 2012 4:12 PM | about stocks: TXN

    Current Price: ~ $34/share
    Projected Yield: ~ 2.04%

    Dallas-based Texas Instruments generates about 96% of its revenue from semiconductors and 4% from its well-known calculators. TI is the world's largest maker of analog chips, which are used to process real-world signals, such as sound and power. TI also has a leading market share position in digital signal processors, used in wireless communications, and has a growing mobile processor business line that is used to run software and applications in many popular smartphones and tablets.

    Estimated WACC for the firm today is 11.92% 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 1190
    2003 1351
    2004 1848
    2005 2442
    2006 1188
    2007 3720
    2008 2567
    2009 1890
    2010 2621
    2011 2440

    Average Annual Growth FCF: ~ 24%

    CAGR FCF: ~ 8%
    Consensus Forecast Industry 5-Year Growth: ~ 15% per year

    Consensus Forecast Company 5-Year Growth: ~ 7% per year

    Internal Growth Rate: ~ 10%

    Sustainable Growth Rate: ~ 17%

    Scenario 1
    Average FCF (2011, 2010, 2009) is $2317 million

    • Start at $2317 million FCF
    • Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 2317
    1 2479
    2 2653
    3 2838
    4 3037
    5 3250
    Terminal Value 29163

    The firm's future cash flows, discounted at a WACC of 11.92%, give a present value for the entire firm (Debt + Equity) of $26748 million. If the firm's fair value of debt is estimated at $4600 million, then the fair value of the firm's equity could be $22148 million. $22148 million / 1140 million outstanding shares is approximately $19 per share and a 20% margin of safety is $15/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 7% per year, then 6% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 2,317
    1 2479
    2 2653
    3 2838
    4 3037
    5 3250
    Terminal Value 58705
    • Present Value of the entire firm (Debt + Equity): $43568 million
    • Value of Equity: $38968 million or $34/share
    • 20% margin of safety is $27/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Texas Instruments

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

    Stocks: TXN
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