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Microchip Technology Inc: MCHP cash flow valuation

July 09, 2011 | About:

Eric Cota

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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. Over 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 8-bit microcontrollers that are suitable for a wider range of less technologically advanced devices.

I estimated the firm's WACC today at 10.50% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:



Year


FCF $Millions


2002


134


2003


180


2004


280


2005


289


2006


361


2007


370


2008


377


2009


206


2010


404


2011


458


Average Annual Growth FCF: ~ 21%

CAGR FCF: ~ 15%

Consensus Forecast Industry 5-Year Growth: ~ 16% per year

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

Scenario 1

Starting at $458 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation



Year


FCF $Millions


0


458


1


518


2


585


3


661


4


747


5


844


Terminal Value


9078


The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $7959 million. If the firm's fair value of debt is estimated at $1574 million, then the fair value of the firm's equity could be $6385 million. $6385 million / 190 million outstanding shares is approximately $34 per share and a 20% margin of safety is $27/share.

Scenario 2

Starting at $458 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and then a growth rate in FCF of 3% per year forever:

Discounted Cash Flow Valuation



Year


FCF $Millions


0


458


1


518


2


585


3


661


4


747


5


844


Terminal Value


12707


The firm's future cash flows, discounted at a WACC of 10.50%, give a present value for the entire firm (Debt + Equity) of $10,162 million. If the firm's fair value of debt is estimated at $1574 million, then the fair value of the firm's equity could be $8588 million. $8588 million / 190 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.

About the author:

Eric Cota
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.4/5 (8 votes)

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