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Texas Instruments Inc: Cash Flow Valuation Update

|Includes:Texas Instruments Inc. (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