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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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  • Microchip Technology Inc: Cash Flow Valuation Update 0 comments
    Jul 17, 2012 7:37 PM | about stocks: MCHP

    Current Price: ~ $32/share
    Projected Yield: ~ 4.44%

    Microchip became an independent company in 1989 when it was spun off from General Instrument. It is based in Chandler, Ariz., with production facilities in Arizona, Oregon, and Thailand. More than 80% of sales come from microcontrollers, which are used in a wide array of electronic devices from LCD displays to remote controls. The company has focused in recent years on lower-end eight-bit microcontrollers that are suitable for a wider range of less technologically advanced devices.

    Estimated WACC for the firm today is 10.36% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    2003180
    2004280
    2005289
    2006361
    2007370
    2008377
    2009206
    2010404
    2011458
    2012334

    Average Annual Growth FCF: ~ 14%

    CAGR FCF: ~ 7%
    Consensus Forecast Industry 5-Year Growth: ~ 15% per year

    Consensus Forecast Company 5-Year Growth: ~ 13% per year

    Internal Growth Rate: ~ 2%

    Sustainable Growth Rate: ~ 3%

    Scenario 1
    Average FCF (2012, 2011, 2010) is $399

    • Start at $399 million FCF
    • Assume a 5-year growth rate in FCF of 13% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0399
    1451
    2509
    3576
    4651
    5735
    Terminal Value8020

    The firm's future cash flows, discounted at a WACC of 10.36%, give a present value for the entire firm (Debt + Equity) of $7043 million. If the firm's fair value of debt is estimated at $1585 million, then the fair value of the firm's equity could be $5458 million. $5458 million / 194 million outstanding shares is approximately $28 per share and a 20% margin of safety is $22/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 7% per year, then 4% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    0399
    1427
    2457
    3489
    4523
    5560
    Terminal Value9419
    • Present Value of the entire firm (Debt + Equity): $7574 million
    • Value of Equity: $5989 million or $31/share
    • 20% margin of safety is $25/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Microchip.com

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

    Stocks: MCHP
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