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.

What Worked in the Stock Market for Long-Term Investors?

Extensive research has found that the companies with predictable revenues and earnings outperform the market average; they also suffer lower probability of loss. As a matter of fact, this kind of companies are exactly what Warren Buffett wants to buy and hold forever. Please read the research about what worked in the stock market:

Part I: What worked in the market from 1998-2008? Part I: Predictability Rank
Part II: Role of Valuations
Part III: Intrinsic Value, Discounted Cash Flow and Margin of Safety

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