Calculating The Intrinsic Value Of Microchip Technology Incorporated (NASDAQ:MCHP)
How far off is Microchip Technology Incorporated (NASDAQ:MCHP) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after February 2018 then I highly recommend you check out the latest calculation for Microchip Technology here.
What’s the value?
I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I took the analyst consensus forecast of MCHP’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 10.41%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $6,164.2M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
The infographic above illustrates how MCHP’s top and bottom lines are expected to move in the future, which should give you some color on MCHP’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is $17,511.3M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $23,675.4M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $101.22, which, compared to the current share price of $93.31, we see that Microchip Technology is about right, perhaps slightly undervalued at a 7.81% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For MCHP, I’ve compiled three pertinent aspects you should further research:
1. Financial Health: Does MCHP have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does MCHP’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of MCHP? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
