Microsoft Excel LibreOffice Calc

Applied Materials Inc. (AMAT)


Present Value of Free Cash Flow to Equity (FCFE)

Difficulty: Intermediate

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)

Applied Materials Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 17.64%
01 FCFE0 3,165 
1 FCFE1 3,602  = 3,165 × (1 + 13.82%) 3,062 
2 FCFE2 4,069  = 3,602 × (1 + 12.95%) 2,940 
3 FCFE3 4,561  = 4,069 × (1 + 12.09%) 2,801 
4 FCFE4 5,073  = 4,561 × (1 + 11.23%) 2,649 
5 FCFE5 5,598  = 5,073 × (1 + 10.36%) 2,485 
5 Terminal value (TV5) 84,869  = 5,598 × (1 + 10.36%) ÷ (17.64%10.36%) 37,666 
Intrinsic value of Applied Materials Inc.’s common stock 51,603 
 
Intrinsic value of Applied Materials Inc.’s common stock (per share) $55.86
Current share price $51.94

Based on: 10-K (filing date: 2018-12-13).

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)

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Assumptions
Rate of return on LT Treasury Composite1 RF 2.13%
Expected rate of return on market portfolio2 E(RM) 11.64%
Systematic risk of Applied Materials Inc.’s common stock βAMAT 1.63
 
Required rate of return on Applied Materials Inc.’s common stock3 rAMAT 17.64%

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).

2 See details »

3 rAMAT = RF + βAMAT [E(RM) – RF]
= 2.13% + 1.63 [11.64%2.13%]
= 17.64%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Applied Materials Inc., PRAT model

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Average Oct 28, 2018 Oct 29, 2017 Oct 30, 2016 Oct 25, 2015 Oct 26, 2014 Oct 27, 2013
Selected Financial Data (US$ in millions)
Dividends 694  428  436  482  487  469 
Net income 3,313  3,434  1,721  1,377  1,072  256 
Net sales 17,253  14,537  10,825  9,659  9,072  7,509 
Total assets 17,773  19,419  14,588  15,308  13,174  12,043 
Stockholders’ equity 6,839  9,349  7,217  7,613  7,868  7,088 
Financial Ratios
Retention rate1 0.79 0.88 0.75 0.65 0.55 -0.83
Profit margin2 19.20% 23.62% 15.90% 14.26% 11.82% 3.41%
Asset turnover3 0.97 0.75 0.74 0.63 0.69 0.62
Financial leverage4 2.60 2.08 2.02 2.01 1.67 1.70
Averages
Retention rate 0.72
Profit margin 14.70%
Asset turnover 0.69
Financial leverage 1.90
 
FCFE growth rate (g)5 13.82%

Based on: 10-K (filing date: 2018-12-13), 10-K (filing date: 2017-12-15), 10-K (filing date: 2016-12-15), 10-K (filing date: 2015-12-09), 10-K (filing date: 2014-12-17), 10-K (filing date: 2013-12-04).

2018 Calculations

1 Retention rate = (Net income – Dividends) ÷ Net income
= (3,313694) ÷ 3,313 = 0.79

2 Profit margin = 100 × Net income ÷ Net sales
= 100 × 3,313 ÷ 17,253 = 19.20%

3 Asset turnover = Net sales ÷ Total assets
= 17,253 ÷ 17,773 = 0.97

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 17,773 ÷ 6,839 = 2.60

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.72 × 14.70% × 0.69 × 1.90 = 13.82%


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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (47,980 × 17.64%3,165) ÷ (47,980 + 3,165) = 10.36%

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


FCFE growth rate (g) forecast

Applied Materials Inc., H-model

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Year Value gt
1 g1 13.82%
2 g2 12.95%
3 g3 12.09%
4 g4 11.23%
5 and thereafter g5 10.36%

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)
= 13.82% + (10.36%13.82%) × (2 – 1) ÷ (5 – 1) = 12.95%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 13.82% + (10.36%13.82%) × (3 – 1) ÷ (5 – 1) = 12.09%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 13.82% + (10.36%13.82%) × (4 – 1) ÷ (5 – 1) = 11.23%