# Analog Devices Inc. (NASDAQ:ADI)

## Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.

### Intrinsic Stock Value (Valuation Summary)

Analog Devices Inc., free cash flow to equity (FCFE) forecast

US\$ in thousands, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 14.22%
01 FCFE0 1,488,441
1 FCFE1 1,557,984 = 1,488,441 × (1 + 4.67%) 1,364,046
2 FCFE2 1,657,281 = 1,557,984 × (1 + 6.37%) 1,270,364
3 FCFE3 1,791,101 = 1,657,281 × (1 + 8.07%) 1,202,038
4 FCFE4 1,966,198 = 1,791,101 × (1 + 9.78%) 1,155,291
5 FCFE5 2,191,862 = 1,966,198 × (1 + 11.48%) 1,127,570
5 Terminal value (TV5) 89,154,891 = 2,191,862 × (1 + 11.48%) ÷ (14.22%11.48%) 45,864,353
Intrinsic value of Analog Devices Inc.’s common stock 51,983,661

Intrinsic value of Analog Devices Inc.’s common stock (per share) \$140.94
Current share price \$164.15

Based on: 10-K (filing date: 2020-11-24).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.03% Expected rate of return on market portfolio2 E(RM) 11.89% Systematic risk of Analog Devices Inc.’s common stock βADI 1.24 Required rate of return on Analog Devices Inc.’s common stock3 rADI 14.22%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rADI = RF + βADI [E(RM) – RF]
= 2.03% + 1.24 [11.89%2.03%]
= 14.22%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

Analog Devices Inc., PRAT model

Average Oct 31, 2020 Nov 2, 2019 Nov 3, 2018 Oct 28, 2017 Oct 29, 2016 Oct 31, 2015
Selected Financial Data (US\$ in thousands)
Dividends declared and paid 886,155  777,481  703,307  602,119  513,180  491,059
Net income 1,220,761  1,363,011  1,495,432  727,259  861,664  696,878
Revenue 5,603,056  5,991,065  6,200,942  5,107,503  3,421,409  3,435,092
Total assets 21,468,603  21,392,641  20,449,779  21,141,294  7,970,278  7,062,178
Shareholders’ equity 11,997,945  11,709,188  10,988,540  10,161,540  5,165,618  5,072,959
Financial Ratios
Retention rate1 0.27 0.43 0.53 0.17 0.40 0.30
Profit margin2 21.79% 22.75% 24.12% 14.24% 25.18% 20.29%
Asset turnover3 0.26 0.28 0.30 0.24 0.43 0.49
Financial leverage4 1.79 1.83 1.86 2.08 1.54 1.39
Averages
Retention rate 0.35
Profit margin 22.83%
Asset turnover 0.33
Financial leverage 1.75

FCFE growth rate (g)5 4.67%

Based on: 10-K (filing date: 2020-11-24), 10-K (filing date: 2019-11-26), 10-K (filing date: 2018-11-27), 10-K (filing date: 2017-11-22), 10-K (filing date: 2016-11-22), 10-K (filing date: 2015-11-24).

2020 Calculations

1 Retention rate = (Net income – Dividends declared and paid) ÷ Net income
= (1,220,761886,155) ÷ 1,220,761
= 0.27

2 Profit margin = 100 × Net income ÷ Revenue
= 100 × 1,220,761 ÷ 5,603,056
= 21.79%

3 Asset turnover = Revenue ÷ Total assets
= 5,603,056 ÷ 21,468,603
= 0.26

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 21,468,603 ÷ 11,997,945
= 1.79

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.35 × 22.83% × 0.33 × 1.75
= 4.67%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (60,542,939 × 14.22%1,488,441) ÷ (60,542,939 + 1,488,441)
= 11.48%

where:
Equity market value0 = current market value of Analog Devices Inc.’s common stock (US\$ in thousands)
FCFE0 = the last year Analog Devices Inc.’s free cash flow to equity (US\$ in thousands)
r = required rate of return on Analog Devices Inc.’s common stock

#### FCFE growth rate (g) forecast

Analog Devices Inc., H-model

Year Value gt
1 g1 4.67%
2 g2 6.37%
3 g3 8.07%
4 g4 9.78%
5 and thereafter g5 11.48%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 4.67% + (11.48%4.67%) × (2 – 1) ÷ (5 – 1)
= 6.37%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 4.67% + (11.48%4.67%) × (3 – 1) ÷ (5 – 1)
= 8.07%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 4.67% + (11.48%4.67%) × (4 – 1) ÷ (5 – 1)
= 9.78%