ALLEGRO MICROSYSTEMS, INC. (ALGM) stock intrinsic value fair value estimate & owner earnings analysis

Allegro MicroSystems designs magnetic sensors (position, speed and current) and power/motor-driver chips. About three-quarters of sales go into cars, in steering, braking, electric drivetrains and driver-assistance systems, and most of the rest into industrial equipment such as robotics, data-center power and clean energy. Almost 90% of sales are booked outside the United States: Greater China 28%, Japan 17% and Taiwan 10% in the year to March 2026. The company was a subsidiary of Japan's Sanken Electric until its 2020 listing, and Sanken has since disposed of most of its stake. The record is a textbook chip cycle. Revenue was $591 million in the year to March 2021, when the pandemic shut car plants. It rose to $1,049 million by March 2024, fell 31% to $725 million in the year to March 2025 as car makers and distributors ran down inventory, and recovered to $890 million in the year to March 2026. The June 2026 quarter brought in $259 million, 27% more than a year earlier, and returned to a profit of $16 million. How we measure earnings. We start from operating cash flow and remove working-capital swings. In the year to March 2026 those swings added $55 million, mostly a tax refund and accrued taxes, so we take that out. We deduct stock compensation of $40-60 million a year as a real cost. We deduct only the capital spending needed to maintain the business, not spending on new capacity. We add back the $27 million a year of amortisation from the 2023 Crocus purchase, and in our cases we assume that technology has to be replaced by Allegro's own research. Before paying its lenders, the business generated about $29 million in fiscal 2021, $120-125 million in each of fiscal 2022 to 2024, $11 million at the fiscal 2025 trough and $54 million in fiscal 2026. Our anchor is the median of that full six-year cycle, about $87 million a year, or roughly $0.46 a share. Fiscal 2026 alone was $54 million, so assuming $87 million from year 1 is not a call for growth. It is a return to a level the business has already earned under the same product line-up, and the June quarter's revenue run-rate of over $1 billion a year supports it. We credit no growth beyond that level. Higher chip content per electric vehicle is real, but it depends on customers' adoption choices and share Allegro has not yet won. Debt. At June 2026 Allegro owed $285 million on a term loan due October 2030, at a floating rate of SOFR plus 1.75%, and held $162 million of cash. After keeping a working cash balance, net debt is about $165 million, or $0.88 a share. The interest rate is close to our hurdle, so we make no adjustment for it. Base case: the business earns about $87 million a year before interest through the cycle for 25 years. That rests on Allegro's long history as one of the leading suppliers of automotive magnetic sensors. Earnings then fade to zero over the following decade, because nothing in the filings lets us see further. The business is worth about $1,186 million; less $166 million of debt, that leaves about $1,020 million, or $5.43 a share. Bear case: mid-cycle earnings settle lower at $65 million, as Chinese car makers, already Allegro's largest regional market, source more sensors from domestic suppliers. Within three years a destocking as deep as fiscal 2025 cuts earnings to about $12 million for two years. During those two years the business does not fully cover interest of about $16 million a year, but the $162 million cash balance does. After year 10, earnings fade to zero over another decade. The business is worth about $506 million; less $166 million of debt leaves $340 million, or $1.81 a share. The 2030 term-loan maturity falls after the modeled trough, and with leverage of roughly 2 to 3 times mid-cycle cash flow, refinancing should be available. Bull case: the business returns within two years to the roughly $124 million a year it earned in fiscal 2023-2024, and the magnetic-sensor franchise sustains that indefinitely. The business is worth about $2,053 million; less debt leaves $1,887 million, or $10.05 a share. The previous figures were built on a different measure of earnings and are not directly comparable. The main change in the business since then is the return to profit and the 27% revenue growth in the June 2026 quarter. Margin-of-safety price. We are only moderately sure of the $87 million level. Allegro has been public for just six years, and those years contain two troughs and one boom. The plausible worst outcome is a second deep inventory correction coinciding with share loss in China. The balance sheet can survive that: debt is modest, there is no near-term maturity, no customer is dominant, and the company owns its design and test capability. If we are wrong about mid-cycle earnings by $20 million and about how long the franchise lasts, the shares are worth around $3.50-4.00. If a trough arrives early in the holding period, they are worth less than $2. Allegro pays no dividend, so the return depends entirely on earnings recovering, and the price assumes that recovery within three to four years. From $2.25 a share, if earnings return to their demonstrated mid-cycle level and the shares come to reflect a value near $5.40 in about four years, the base case implies roughly 24% a year. That leaves room for a slower recovery or a shallower bear outcome while still clearing 20%, and it is close to our bear-case value, so the downside is limited. That is why the margin-of-safety price is $2.25.