Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Microchip Technology Inc: Cash Flow Valuation Update

|Includes:Microchip Technology Incorporated (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:

Year FCF $Millions
2003 180
2004 280
2005 289
2006 361
2007 370
2008 377
2009 206
2010 404
2011 458
2012 334

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

Year FCF $Millions
0 399
1 451
2 509
3 576
4 651
5 735
Terminal Value 8020

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

Year FCF $Millions
0 399
1 427
2 457
3 489
4 523
5 560
Terminal Value 9419
  • 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