Stock Analysis on Net
Stock Analysis on Net

Applied Materials Inc. (NASDAQ:AMAT)

Present Value of Free Cash Flow to Equity (FCFE)

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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 asset base.

Intrinsic Stock Value (Valuation Summary)

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

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 18.73%
01 FCFE0 4,612
1 FCFE1 6,199 = 4,612 × (1 + 34.41%) 5,221
2 FCFE2 8,018 = 6,199 × (1 + 29.34%) 5,687
3 FCFE3 9,964 = 8,018 × (1 + 24.27%) 5,952
4 FCFE4 11,877 = 9,964 × (1 + 19.20%) 5,976
5 FCFE5 13,556 = 11,877 × (1 + 14.13%) 5,744
5 Terminal value (TV5) 336,166 = 13,556 × (1 + 14.13%) ÷ (18.73% – 14.13%) 142,450
Intrinsic value of Applied Materials Inc. common stock 171,030
 
Intrinsic value of Applied Materials Inc. common stock (per share) $203.67
Current share price $136.20

Based on: 10-K (reporting date: 2022-10-30).

1 See details »

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 3.99%
Expected rate of return on market portfolio2 E(RM) 13.77%
Systematic risk of Applied Materials Inc. common stock βAMAT 1.51
 
Required rate of return on Applied Materials Inc. common stock3 rAMAT 18.73%

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]
= 3.99% + 1.51 [13.77% – 3.99%]
= 18.73%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Applied Materials Inc., PRAT model

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Average Oct 30, 2022 Oct 31, 2021 Oct 25, 2020 Oct 27, 2019 Oct 28, 2018 Oct 29, 2017
Selected Financial Data (US$ in millions)
Dividends declared 879 851 796 770 694 428
Net income 6,525 5,888 3,619 2,706 3,313 3,434
Net sales 25,785 23,063 17,202 14,608 17,253 14,537
Total assets 26,726 25,825 22,353 19,024 17,773 19,419
Stockholders’ equity 12,194 12,247 10,578 8,214 6,839 9,349
Financial Ratios
Retention rate1 0.87 0.86 0.78 0.72 0.79 0.88
Profit margin2 25.31% 25.53% 21.04% 18.52% 19.20% 23.62%
Asset turnover3 0.96 0.89 0.77 0.77 0.97 0.75
Financial leverage4 2.19 2.11 2.11 2.32 2.60 2.08
Averages
Retention rate 0.81
Profit margin 22.20%
Asset turnover 0.85
Financial leverage 2.23
 
FCFE growth rate (g)5 34.41%

Based on: 10-K (reporting date: 2022-10-30), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-25), 10-K (reporting date: 2019-10-27), 10-K (reporting date: 2018-10-28), 10-K (reporting date: 2017-10-29).

2022 Calculations

1 Retention rate = (Net income – Dividends declared) ÷ Net income
= (6,525 – 879) ÷ 6,525
= 0.87

2 Profit margin = 100 × Net income ÷ Net sales
= 100 × 6,525 ÷ 25,785
= 25.31%

3 Asset turnover = Net sales ÷ Total assets
= 25,785 ÷ 26,726
= 0.96

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 26,726 ÷ 12,194
= 2.19

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.81 × 22.20% × 0.85 × 2.23
= 34.41%

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

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (114,374 × 18.73% – 4,612) ÷ (114,374 + 4,612)
= 14.13%

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

FCFE growth rate (g) forecast

Applied Materials Inc., H-model

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Year Value gt
1 g1 34.41%
2 g2 29.34%
3 g3 24.27%
4 g4 19.20%
5 and thereafter g5 14.13%

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 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 34.41% + (14.13% – 34.41%) × (2 – 1) ÷ (5 – 1)
= 29.34%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 34.41% + (14.13% – 34.41%) × (3 – 1) ÷ (5 – 1)
= 24.27%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 34.41% + (14.13% – 34.41%) × (4 – 1) ÷ (5 – 1)
= 19.20%