Two Barron’s journalists, Jack Hough and Teresa Rivas, think that Intel (INTC, Financial) has 25% more upside at $38 a share. On the other hand, Bernstein's Stacy Rasgon thinks that Intel could just be worth $26 a share.
Intel Corporation price action
Barron’s has the following highlights on being an Intel bull; sources are here and here.
- The possibility that Intel’s tumbling personal computer sales could stabilize.
- Intel could at long last make solid gains in mobile phones.
- Its data center business could remain lucrative.
- Given all the pessimism surrounding the first quarter, just meeting expectations might give Intel a boost.
- The company has been building its data center business. Some analysts think it may be enough to resume earnings growth by next year, even as PC sales slide.
- Data centers are profiting exactly for the same reasons that PCs are declining.
- Intel could also ink a deal with Apple (AAPL) to supply chips for the iPhone 7, wresting the business away from archrival Qualcomm (QCOM, Financial).
Rasgon has provided the following reasons for his downgrade: (source)
- "[W]e (Bernstein) do not believe this means the company is necessarily out of the woods."
- Pessimistic outlook in 2015 first quarter sales: Of course things don't really look fine.
- Inventories have ballooned over the last year, increasing the risk of underutilization in the event of cuts.
- "Receivables have once again spiked. And, of course, they are already resorting to accounting changes that are in part serving to mask deterioration."
- The shares aren't necessarily expensive, but neither are they cheap.
- Intel's PC growth trajectory remains challenging with new products having little to no impact on demand.
- Data center appears to be weakening meaningfully vs. the company's long-term goals.
- A meaningful reset to full-year estimates is possible when the company reports earnings in April.
Reviewing again the above bullet points may confuse current and future Intel shareholders. I am more on the optimistic side, so I side more with Barron’s. Nevertheless, I will run some financial numbers and see whether Intel would be a good investment in any price hiccup that may happen.
Intel’s financial numbers
Sales and profits
Intel has grown its sales and profits by 4% and 12% for the past decade. In the recent five years (2010-2015), Intel was able to grow its sales at 5%, while profits were at a low of 0.9%.
Operating expenses (mil.)
Research and development and selling, general and administrative expenses as % of sales
Sure, operating expenses are on the rise. But dissecting which expenses are costing the company more revealed that Intel is spending more on its research and development (blue) than hiking employee salaries and other related operational expenses (red).
Net shareholder distributions (dividends and buybacks) as % of profit and free cash flow
It looks like Intel has some groove in maintaining its annual dividends and buybacks. Dividends have grown at 1.58% in the past three years and 5.59% in the past five years.
Debt to equity and shares outstanding
Intel looks like it's been increasing its debt over recent years but still conservatively low (<0.5). In contrast, its buybacks seem promising as shares outstanding have been declining in the past decade.
Valuations
Intel appears to be at a discount, compared to its industry and to the Standard & Poor's 500. This is probably because it had experienced -8.75% return year to date.
Intrinsic value calculation (capital asset pricing model: CAPM)
Using a 10-year growth rate of 6% for its free cash flow and a terminal growth rate of just 5%, I arrived at the following intrinsic value:
Data included not shown in the graph are as follows: 10-year treasury rate of 1.90%, beta average of 0.99, 6% for equity risk premium, tax rate of 23%, weighted average cost of debt of 3.64% and quarterly numbers of shareholder equity and debt.
Altogether applying basic multiplication with industry and S&P 500 multiples in current Intel earnings per share and book value revealed the following table:
Well, interestingly, I somehow matched Bernstein’s pessimistic target price for Intel although I am optimistic about the company’s business operations. Nevertheless, I would still want a pullback in Intel shares before diving in.
Rest in peace, Andrew Grove, 79 (Sept. 2, 1936-March 21, 2016). The Intel mastermind. (source)
"Success breeds complacency. Complacency breeds failure. Only the paranoid survive." — Andy Grove
