With the recent pullback in the markets and especially in tech I figured I would take a look at Intel Corporation (INTC). I currently own just over 45 shares of Intel and would be interested in adding more at the right price. Intel closed on Thursday 5/31/12 at $25.84.
Intel Corporation designs, manufactures, and sells integrated digital technology platforms primarily in the Asia-Pacific, the Americas, Europe, and Japan. The company offers microprocessors that process system data and controls other devices in the system; and chipsets, which sends data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and CD, DVD, or Blu-ray drives; system-on-chip products that integrate its processing functions with other system components, including graphics, audio, and video onto a single chip; wired network connectivity products; and wireless connectivity products. It also provides mobile phone components comprising baseband processors, radio frequency transceivers, and power management integrated circuits; and mobile phone platforms, such as Bluetooth wireless technology and GPS receivers, software solutions, customization, and interoperability tests. In addition, the company offers endpoint security, network and content security, risk and compliance, and consumer and mobile security software products for consumer, mobile, and corporate environments to protect systems from malicious virus attacks, as well as loss of data. Further, it develops and licenses embedded and mobile device software products that comprise operating systems, virtualization technologies, middleware, and development tools; and provides NAND flash memory products, which are used in solid-state drives, portable memory storage devices, digital camera memory cards, and other devices. The company markets its products primarily to original equipment manufacturers, original design manufacturers, and industrial and communications equipment manufacturers in the computing and communications industries.
Analysts expect Intel to grow earnings 11.80% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter. Running these numbers through a DCF analysis with a 11% discount rate yields a fair value price of $45.23. This means that at $25.84 the shares are undervalued by 43%.
Over the last 12 months, INTC's EPS were $2.36 and it's current book value per share is $9.34. The Graham Number is calculated to be $22.27 which means that at $25.84 the shares are overvalued by 16%.
Average High Dividend Yield:
Intel's average high dividend yield for the past 5 years is 3.97% and for the past 10 years is 2.98%. This gives target prices of $22.65 and $30.23 respectively based on the current annual dividend of $0.90. These are overvalued by 14% and undervalued by 14.5%, respectively.
Average Low PE Ratio:
Intel's average low PE ratio for the past 5 years is 11.41 and for the past 10 years is 14.40. This would correspond to a price per share of $28.52 and $35.99 respectively based off the analyst estimate of $2.50 per share for the fiscal year ending in December 2012. The 5 year and 10 year low PE price targets are undervalued by 9% and 28%, respectively.
Average Low P/S Ratio:
Intel's average low PS ratio for the past 5 years is 2.01 and for the past 10 years is 2.60. This would correspond to a price per share of $22.99 and $29.72 respectively based off the analyst estimate for revenue growth from 2011 to 2012. The 5 year and 10 year low PE price targets are overvalued by 12% and undervalued 13%, respectively.
Dividend Discount Model:
For the DDM I assumed that Intel will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 11.54%. After that I assumed INTC can continue to raise dividends by 3.50% annually and used a discount rate of 8%. Based on this INTC is worth $25.70 meaning it's fairly valued at $25.84. While I think that Intel can continue to increase it's dividend by more than 3.50% per year after 5 years it's a good estimate to use to give a conservative valuation price.
INTC's trailing PE is 10.95 and it's forward PE is 9.61. The PE3 based on the average earnings for the last 3 years is 14.99. Compared to it's industry, INTC seems to be undervalued versus TXN (18.40) and undervalued versus the industry as a whole (18.97). All industry and competitor comparisons are on a TTM EPS basis.
Intel's gross margin for FY 2010 and FY 2011 was 65.31% and 62.51% respectively. Their gross margin is very high at greater than 60% and consistent too. I like to see both a steady gross margin and greater than 40%. Their net income margin for the same years were 26.28% and 23.97% respectively. I like the net income margin to be at least 10% and preferably rising. Intel is doing great on the net profit margin with a consistent 20%+. The cash-to-debt ratio for the same years were 2.65 and 0.71. I don't like to see the debt to increase as much as it did from 2010 to 2011. Their debt increased 3.5 times from the end of 2010 to the end of 2011. This is something to take notice of because financing the growth of the company through debt can get them in to trouble which could lead to issues with their dividend.
INTC has bought back an average of 2.83% of their shares outstanding annually since 2002.
A negative number for the % change value means shares were bought back by the company and a positive value means the shares outstanding increased.
Intel is a dividend contender with 9 consecutive years of dividend increases. Their annual increase for the last 1, 3, 5 and 10 years has been 11.54%, 15.82%, 14.09% and 24.15%. Their payout ratio has been falling despite the rapid dividend growth. The average payout ratio since 2001 is 35.55% and has ranged from a low of 9.41% to a high of 72.73%. Intel's payout ratio varies so much due to the fact that their earnings are largely based off the business cycle of tech spending. As long as the payout ratio doesn't reach 60%+ for 2 years in a row I wouldn't be worried.
The FCF payout ratio was looking very nice up until 2011. Until then their FCF payout ratio had been less than 100% and had averaged 51% since 2002.
Return on Equity and Return on Capital Invested:
Intel's ROE and ROCI are in a general uptrend but do vary a lot. In 2001 their ROE was 4.70% and their ROCI was 4.60%. It then increased to a high of 23.90% and 22.60% in 2005 just to fall to a low of 11.00% and 10.50% in 2009. I prefer to see a general uptrend in both the ROE and ROCI.
Revenue and Net Income:
Since the basis of dividend growth is revenue and net income growth I've added a new section to my stock analysis. Here you can see Intel's history of revenue and net income since 2001. Their revenue growth is cyclical in nature but is in a long term uptrend.
Average Price and EPS:
Intel's average share price has not followed the path of their EPS mainly due to the fact that in 2001 during the tech bubble bursting they had a ridiculously high PE ratio. Currently Intel is lower than it's average low PE ratio.
The chart shows the historical prices for the previous 10 years and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 5 years, 10 years or 16 whichever is least. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. In this case the target PE is 8.56 which in my opinion is too low for Intel to sell for which corresponds to a $21.39 entry price. Intel is trading at a $4.45 premium to the forecast entry price.
The average of all the valuation models gives a fair value of $30.40 which means that Intel is currently trading at a 15% discount to the average fair value.
While it looks like Intel is pretty close to being a good investment with a solid margin of safety it does have it's issues. The sale of desktop and laptop computers which were huge drivers for growth for Intel in the past have been decreasing. While their chips are dominating the server market they are severely lacking in the smart phone and tablet computer markets. They have been researching methods to decrease the power consumption of their chips while providing more processing power. If they can break into the tablet and mobile markets Intel will prove to have a second phase to their growth story.
At a 3.50% target yield you would need to buy at the $25.71 mark and for a 4.00% yield the purchase price would need to be $22.50. If Intel stays at current levels when I am able to purchase next month I'll be adding to my current position. And a further drop in tech or the markets as a whole could bring about the 4.00% yield level.