Intrinsic value of Microchip Technology - MCHP

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$74.43

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$74.43

 
Intrinsic value

$613.44

 
Up/down potential

+724%

 
Rating

str. buy

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MCHP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 16.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  1.21
  54.40
  49.46
  45.01
  41.01
  37.41
  34.17
  31.25
  28.63
  26.27
  24.14
  22.22
  20.50
  18.95
  17.56
  16.30
  15.17
  14.15
  13.24
  12.41
  11.67
  11.01
  10.41
  9.86
  9.38
  8.94
  8.55
  8.19
  7.87
  7.59
  7.33
Revenue, $m
  2,173
  3,355
  5,015
  7,272
  10,254
  14,090
  18,905
  24,814
  31,917
  40,300
  50,028
  61,147
  73,683
  87,647
  103,036
  119,832
  138,011
  157,545
  178,402
  200,550
  223,961
  248,609
  274,478
  301,555
  329,835
  359,324
  390,033
  421,984
  455,205
  489,734
  525,616
Variable operating expenses, $m
 
  2,713
  4,005
  5,762
  8,083
  11,069
  14,817
  19,416
  24,945
  31,470
  39,042
  47,595
  57,354
  68,223
  80,201
  93,275
  107,426
  122,630
  138,865
  156,105
  174,327
  193,513
  213,649
  234,725
  256,738
  279,691
  303,595
  328,465
  354,324
  381,200
  409,130
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  1,821
  2,713
  4,005
  5,762
  8,083
  11,069
  14,817
  19,416
  24,945
  31,470
  39,042
  47,595
  57,354
  68,223
  80,201
  93,275
  107,426
  122,630
  138,865
  156,105
  174,327
  193,513
  213,649
  234,725
  256,738
  279,691
  303,595
  328,465
  354,324
  381,200
  409,130
Operating income, $m
  352
  642
  1,010
  1,510
  2,171
  3,021
  4,088
  5,398
  6,972
  8,830
  10,986
  13,551
  16,329
  19,424
  22,834
  26,557
  30,586
  34,915
  39,537
  44,445
  49,634
  55,096
  60,829
  66,830
  73,097
  79,633
  86,438
  93,519
  100,881
  108,534
  116,486
EBITDA, $m
  635
  1,001
  1,496
  2,169
  3,059
  4,203
  5,639
  7,401
  9,520
  12,021
  14,923
  18,239
  21,978
  26,144
  30,734
  35,744
  41,167
  46,993
  53,214
  59,821
  66,804
  74,156
  81,872
  89,949
  98,385
  107,181
  116,341
  125,871
  135,780
  146,080
  156,783
Interest expense (income), $m
  53
  86
  118
  192
  293
  427
  599
  814
  1,079
  1,397
  1,773
  2,209
  2,707
  3,269
  3,895
  4,584
  5,337
  6,151
  7,027
  7,961
  8,954
  10,003
  11,107
  12,266
  13,479
  14,747
  16,068
  17,444
  18,876
  20,364
  21,911
Earnings before tax, $m
  281
  556
  892
  1,318
  1,878
  2,595
  3,490
  4,583
  5,893
  7,432
  9,213
  11,342
  13,622
  16,155
  18,940
  21,973
  25,249
  28,763
  32,510
  36,484
  40,680
  45,094
  49,722
  54,564
  59,618
  64,886
  70,370
  76,075
  82,006
  88,170
  94,574
Tax expense, $m
  -43
  150
  241
  356
  507
  701
  942
  1,238
  1,591
  2,007
  2,487
  3,062
  3,678
  4,362
  5,114
  5,933
  6,817
  7,766
  8,778
  9,851
  10,984
  12,175
  13,425
  14,732
  16,097
  17,519
  19,000
  20,540
  22,142
  23,806
  25,535
Net income, $m
  324
  406
  651
  962
  1,371
  1,894
  2,548
  3,346
  4,302
  5,426
  6,725
  8,280
  9,944
  11,793
  13,826
  16,040
  18,432
  20,997
  23,733
  26,634
  29,696
  32,918
  36,297
  39,831
  43,521
  47,367
  51,370
  55,535
  59,864
  64,364
  69,039

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,446
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  5,538
  4,773
  7,133
  10,344
  14,586
  20,043
  26,892
  35,297
  45,401
  57,326
  71,164
  86,980
  104,812
  124,676
  146,566
  170,457
  196,318
  224,104
  253,772
  285,277
  318,578
  353,641
  390,438
  428,954
  469,182
  511,129
  554,813
  600,262
  647,518
  696,634
  747,675
Adjusted assets (=assets-cash), $m
  3,092
  4,773
  7,133
  10,344
  14,586
  20,043
  26,892
  35,297
  45,401
  57,326
  71,164
  86,980
  104,812
  124,676
  146,566
  170,457
  196,318
  224,104
  253,772
  285,277
  318,578
  353,641
  390,438
  428,954
  469,182
  511,129
  554,813
  600,262
  647,518
  696,634
  747,675
Revenue / Adjusted assets
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
  0.703
Average production assets, $m
  1,150
  1,775
  2,653
  3,847
  5,424
  7,454
  10,001
  13,126
  16,884
  21,319
  26,465
  32,347
  38,978
  46,366
  54,506
  63,391
  73,008
  83,341
  94,375
  106,091
  118,475
  131,514
  145,199
  159,522
  174,483
  190,082
  206,328
  223,229
  240,803
  259,069
  278,051
Working capital, $m
  2,715
  416
  622
  902
  1,272
  1,747
  2,344
  3,077
  3,958
  4,997
  6,203
  7,582
  9,137
  10,868
  12,776
  14,859
  17,113
  19,536
  22,122
  24,868
  27,771
  30,828
  34,035
  37,393
  40,900
  44,556
  48,364
  52,326
  56,445
  60,727
  65,176
Total debt, $m
  2,453
  3,361
  5,486
  8,376
  12,194
  17,105
  23,269
  30,833
  39,927
  50,659
  63,113
  77,348
  93,397
  111,275
  130,975
  152,478
  175,752
  200,760
  227,461
  255,816
  285,786
  317,343
  350,460
  385,124
  421,330
  459,082
  498,397
  539,301
  581,832
  626,037
  671,974
Total liabilities, $m
  3,387
  4,295
  6,420
  9,310
  13,128
  18,039
  24,203
  31,767
  40,861
  51,593
  64,047
  78,282
  94,331
  112,209
  131,909
  153,412
  176,686
  201,694
  228,395
  256,750
  286,720
  318,277
  351,394
  386,058
  422,264
  460,016
  499,331
  540,235
  582,766
  626,971
  672,908
Total equity, $m
  2,151
  477
  713
  1,034
  1,459
  2,004
  2,689
  3,530
  4,540
  5,733
  7,116
  8,698
  10,481
  12,468
  14,657
  17,046
  19,632
  22,410
  25,377
  28,528
  31,858
  35,364
  39,044
  42,895
  46,918
  51,113
  55,481
  60,026
  64,752
  69,663
  74,768
Total liabilities and equity, $m
  5,538
  4,772
  7,133
  10,344
  14,587
  20,043
  26,892
  35,297
  45,401
  57,326
  71,163
  86,980
  104,812
  124,677
  146,566
  170,458
  196,318
  224,104
  253,772
  285,278
  318,578
  353,641
  390,438
  428,953
  469,182
  511,129
  554,812
  600,261
  647,518
  696,634
  747,676
Debt-to-equity ratio
  1.140
  7.040
  7.690
  8.100
  8.360
  8.530
  8.650
  8.740
  8.790
  8.840
  8.870
  8.890
  8.910
  8.930
  8.940
  8.950
  8.950
  8.960
  8.960
  8.970
  8.970
  8.970
  8.980
  8.980
  8.980
  8.980
  8.980
  8.980
  8.990
  8.990
  8.990
Adjusted equity ratio
  -0.095
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  324
  406
  651
  962
  1,371
  1,894
  2,548
  3,346
  4,302
  5,426
  6,725
  8,280
  9,944
  11,793
  13,826
  16,040
  18,432
  20,997
  23,733
  26,634
  29,696
  32,918
  36,297
  39,831
  43,521
  47,367
  51,370
  55,535
  59,864
  64,364
  69,039
Depreciation, amort., depletion, $m
  283
  359
  486
  659
  887
  1,182
  1,551
  2,004
  2,548
  3,191
  3,937
  4,688
  5,649
  6,720
  7,899
  9,187
  10,581
  12,078
  13,677
  15,375
  17,170
  19,060
  21,043
  23,119
  25,287
  27,548
  29,903
  32,352
  34,899
  37,546
  40,297
Funds from operations, $m
  823
  765
  1,137
  1,621
  2,258
  3,076
  4,098
  5,350
  6,850
  8,617
  10,662
  12,968
  15,593
  18,513
  21,726
  25,227
  29,013
  33,076
  37,410
  42,009
  46,867
  51,978
  57,340
  62,951
  68,808
  74,915
  81,273
  87,887
  94,763
  101,910
  109,337
Change in working capital, $m
  79
  147
  206
  280
  370
  476
  597
  733
  881
  1,039
  1,206
  1,379
  1,555
  1,732
  1,908
  2,083
  2,254
  2,422
  2,586
  2,746
  2,903
  3,056
  3,208
  3,357
  3,507
  3,657
  3,808
  3,962
  4,119
  4,282
  4,449
Cash from operations, $m
  744
  683
  931
  1,341
  1,889
  2,600
  3,501
  4,617
  5,969
  7,577
  9,456
  11,589
  14,039
  16,781
  19,817
  23,144
  26,758
  30,654
  34,824
  39,263
  43,964
  48,922
  54,133
  59,593
  65,302
  71,258
  77,465
  83,925
  90,644
  97,628
  104,887
Maintenance CAPEX, $m
  0
  -167
  -257
  -384
  -558
  -786
  -1,080
  -1,449
  -1,902
  -2,447
  -3,090
  -3,835
  -4,688
  -5,649
  -6,720
  -7,899
  -9,187
  -10,581
  -12,078
  -13,677
  -15,375
  -17,170
  -19,060
  -21,043
  -23,119
  -25,287
  -27,548
  -29,903
  -32,352
  -34,899
  -37,546
New CAPEX, $m
  -98
  -625
  -878
  -1,194
  -1,578
  -2,029
  -2,547
  -3,126
  -3,758
  -4,435
  -5,146
  -5,882
  -6,632
  -7,387
  -8,140
  -8,885
  -9,617
  -10,333
  -11,033
  -11,716
  -12,384
  -13,039
  -13,684
  -14,324
  -14,960
  -15,600
  -16,245
  -16,902
  -17,574
  -18,266
  -18,981
Cash from investing activities, $m
  800
  -792
  -1,135
  -1,578
  -2,136
  -2,815
  -3,627
  -4,575
  -5,660
  -6,882
  -8,236
  -9,717
  -11,320
  -13,036
  -14,860
  -16,784
  -18,804
  -20,914
  -23,111
  -25,393
  -27,759
  -30,209
  -32,744
  -35,367
  -38,079
  -40,887
  -43,793
  -46,805
  -49,926
  -53,165
  -56,527
Free cash flow, $m
  1,544
  -108
  -204
  -237
  -247
  -216
  -126
  42
  309
  696
  1,220
  1,872
  2,719
  3,745
  4,957
  6,360
  7,954
  9,739
  11,712
  13,869
  16,204
  18,712
  21,388
  24,226
  27,222
  30,371
  33,672
  37,121
  40,718
  44,464
  48,359
Issuance/(repayment) of debt, $m
  589
  908
  2,124
  2,890
  3,818
  4,911
  6,164
  7,564
  9,094
  10,732
  12,454
  14,234
  16,049
  17,878
  19,700
  21,503
  23,274
  25,008
  26,701
  28,355
  29,971
  31,556
  33,118
  34,664
  36,206
  37,752
  39,315
  40,904
  42,531
  44,205
  45,937
Issuance/(repurchase) of shares, $m
  -335
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  231
  908
  2,124
  2,890
  3,818
  4,911
  6,164
  7,564
  9,094
  10,732
  12,454
  14,234
  16,049
  17,878
  19,700
  21,503
  23,274
  25,008
  26,701
  28,355
  29,971
  31,556
  33,118
  34,664
  36,206
  37,752
  39,315
  40,904
  42,531
  44,205
  45,937
Total cash flow (excl. dividends), $m
  1,776
  800
  1,921
  2,652
  3,572
  4,696
  6,038
  7,606
  9,403
  11,428
  13,674
  16,106
  18,769
  21,623
  24,658
  27,863
  31,228
  34,747
  38,413
  42,223
  46,175
  50,269
  54,506
  58,891
  63,428
  68,124
  72,986
  78,025
  83,248
  88,668
  94,296
Retained Cash Flow (-), $m
  -106
  -772
  -236
  -321
  -424
  -546
  -685
  -840
  -1,010
  -1,192
  -1,384
  -1,582
  -1,783
  -1,986
  -2,189
  -2,389
  -2,586
  -2,779
  -2,967
  -3,151
  -3,330
  -3,506
  -3,680
  -3,852
  -4,023
  -4,195
  -4,368
  -4,545
  -4,726
  -4,912
  -5,104
Prev. year cash balance distribution, $m
 
  2,446
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  2,474
  1,685
  2,331
  3,147
  4,150
  5,353
  6,766
  8,393
  10,235
  12,290
  14,525
  16,985
  19,636
  22,469
  25,473
  28,642
  31,969
  35,447
  39,073
  42,845
  46,762
  50,826
  55,039
  59,405
  63,929
  68,618
  73,480
  78,523
  83,757
  89,192
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  2,372
  1,542
  2,029
  2,591
  3,217
  3,885
  4,571
  5,246
  5,880
  6,443
  6,897
  7,248
  7,466
  7,543
  7,479
  7,279
  6,956
  6,528
  6,016
  5,444
  4,837
  4,217
  3,607
  3,026
  2,487
  2,002
  1,577
  1,215
  914
  672
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Microchip Technology Incorporated develops, manufactures, and sells semiconductor products for various embedded control applications. The company offers microcontrollers, such as 8-bit, 16-bit, and 32-bit microcontrollers under the PIC brand name; and microcontrollers for automotive networking, computing, lighting, power supplies, motor control, wired connectivity, and wireless connectivity. It also provides development tools that enable system designers to program PIC microcontrollers for specific applications; analog, interface, mixed signal, and timing products comprising power management, linear, mixed-signal, high-voltage, thermal management, RF, drivers, safety and security, USB, Ethernet, wireless, and other interface products; and memory products consisting of serial electrically erasable programmable read-only memory, serial flash memories, parallel flash memories, and serial SRAM memories for the production of very small footprint devices. In addition, the company licenses its SuperFlash embedded flash and Smartbits one time programmable NVM technologies to foundries, integrated device manufacturers, and design partners for use in the manufacture of microcontroller products, gate array, RF, and analog products that require embedded non-volatile memory, as well as provides engineering services. It serves automotive, communications, computing, consumer, office automation, telecommunication, aerospace, defense, safety, security, medical, and industrial control markets. The company sells its products through a network of direct sales personnel and distributors in the Americas, Europe, and Asia. Microchip Technology Incorporated was founded in 1989 and is headquartered in Chandler, Arizona.

FINANCIAL RATIOS  of  Microchip Technology (MCHP)

Valuation Ratios
P/E Ratio 46.9
Price to Sales 7
Price to Book 7.1
Price to Tangible Book
Price to Cash Flow 20.4
Price to Free Cash Flow 23.5
Growth Rates
Sales Growth Rate 1.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -34.2%
Cap. Spend. - 3 Yr. Gr. Rate 14%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 114%
Total Debt to Equity 114%
Interest Coverage 6
Management Effectiveness
Return On Assets 7.5%
Ret/ On Assets - 3 Yr. Avg. 9.2%
Return On Total Capital 7.6%
Ret/ On T. Cap. - 3 Yr. Avg. 10.4%
Return On Equity 15.4%
Return On Equity - 3 Yr. Avg. 17.5%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 55.5%
Gross Margin - 3 Yr. Avg. 57.1%
EBITDA Margin 28.4%
EBITDA Margin - 3 Yr. Avg. 31.1%
Operating Margin 16.2%
Oper. Margin - 3 Yr. Avg. 19.1%
Pre-Tax Margin 12.9%
Pre-Tax Margin - 3 Yr. Avg. 17.1%
Net Profit Margin 14.9%
Net Profit Margin - 3 Yr. Avg. 17.5%
Effective Tax Rate -15.3%
Eff/ Tax Rate - 3 Yr. Avg. -4.1%
Payout Ratio 89.8%

MCHP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MCHP stock intrinsic value calculation we used $2173 million for the last fiscal year's total revenue generated by Microchip Technology. The default revenue input number comes from 2016 income statement of Microchip Technology. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MCHP stock valuation model: a) initial revenue growth rate of 54.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for MCHP is calculated based on our internal credit rating of Microchip Technology, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Microchip Technology.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MCHP stock the variable cost ratio is equal to 82.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MCHP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Microchip Technology.

Corporate tax rate of 27% is the nominal tax rate for Microchip Technology. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MCHP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MCHP are equal to 52.9%.

Life of production assets of 6.9 years is the average useful life of capital assets used in Microchip Technology operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MCHP is equal to 12.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $2151 million for Microchip Technology - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 216.183 million for Microchip Technology is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Microchip Technology at the current share price and the inputted number of shares is $16.1 billion.


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Stock chart of MCHP Financial statements of MCHP
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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