In order to evaluate if Intel (INTC) is an attractive value stock, I’ll try and answer three questions: Is Intel a good business? Is the balance sheet conservative and are the valuation and intrinsic returns attractive?
Is Intel a good business?
In order to determine if Intel’s business is financially profitable and strong, let’s look at some key financial measures:
|FCF/Sales|| Intel’s Free Cash Flow generation is quite phenomenal with an average over the last 10 years of 20.7%! The performance over the last 12 months is in line with this average, at 19.6%|
This level of cash generation is quite exceptional and potentially the sign of a high economic moat.
|ROE & ROA|| Intel has had generally good returns in the last 10 years, with average ROE and ROA of 17.5% and 13.5% respectively. In the last couple of years, INTC’s performance has been higher than average with ROE and ROA of 27% and 19%, respectively. |
Over the last 10 years ROE has only been twice below my personal “threshold” of 12%, in 2002 and 2009. Similarly those years also saw ROA dip below my target of 9%.
Overall, Intel’s returns point to a strong business model, giving superior returns over long periods of time to Intel and its shareholders
|Revenue growth|| Intel is in a cyclical industry that tends to grow in bursts, followed by years of contractions. Over the last 10 years, Intel’s average growth has been around 4-6% but this average is not representative as the most common readings in year over year are +15% or -8%! |
Nevertheless, despite the industry cycle, Intel has shown an ability to grow revenue consistently.
After looking at this performance, it seems that we can positively answer that Intel has a strong business model and a strong economic moat, leading to superior cash generation and returns.
Is Intel’s balance sheet solid?
In order to evaluate the potential balance sheet risk with a company, I look at three metrics:
|Debt/Equity||Intel maintains low levels of debt with a Debt/Equity of 0.15x currently.|
|Debt service||Intel’s Debt/Operating income is lower than 15%; in addition Intel carries 8x! more cash on its balance sheet than it has debt|
|Altman z-score||Intel’s z-score of 3.10 is consistent with a company that is not likely to experience balance sheet distress any time soon!|
So it seems that Intel is financed very conservatively; we probably should not worry about balance sheet risk when considering INTC as an investment.
Is Intel’s valuation attractive?
In order to evaluate Intel’s valuation, let’s look at a few multiples, based on earnings and cash flow:
|P/E|| Intel’s P/E is 10.0x (using stock price of $23.8), which appears to be quite low compared to the S&P’s current multiple of 13.5x, especially given the quality of Intel as a company. |
Using the average of the last three years of earnings — a technique recommended by Ben Graham — we get to a P/E of 14.0x, lower than the 15x Graham considered as a threshold for stocks he would be considering.
|Cash Yield||Intel’s cash yield is currently at 9.2% — more than four times the current five-year yield on AA corporate bonds! This is a very attractive cash return for investors willing to take a bit more risk than investing in a bond!|
Given what we know so far of Intel a below market valuation and a very high cash yield looks to be very attractive and could provide a very interesting entry point for investors.
What are the intrinsic returns an investor could expect from Intel?
The three components of intrinsic returns I take into account are growth, dividends and cash used to buyback stocks (or decrease net debt).
In terms of growth, the current analyst consensus is about 9%, taking a bit of a discount I will use a projected growth of 7%, consistent with long term averages. To generate 7% of growth, with a ROE of approximately 20%, Intel needs to re-invest 35% of its earnings.
Intel currently pays an attractive dividend, yielding 3.6% using about 30% of earnings.
After funding growth and dividends, Intel has about 35% of its earnings left which it can use to buyback dividends or accumulate cash, equivalent to 3.5% of the company’s value (35% of earnings left * 10% earnings yield).
So in total, we could be expecting returns of about 14% (growth + dividends + buybacks/cash) by investing in Intel’s stock — which is a very attractive return!
Conclusion: Intel is an attractive value stock!
So all in all, Intel is a great company from a financial standpoint, has a very conservative balance sheet and is currently trading at low levels of valuation, creating an opportunity to invest and benefit from superior intrinsic returns!
Have you looked at Intel recently? Do you share the view that Intel is attractive or do you have some doubts?