In the past few weeks, I have performed valuation analysis of market dominating companies such as Microsoft (MSFT), Google (GOOG), Apple (AAPL), Cisco (CSCO), Johnson & Johnson (JNJ), and Colgate Palmolive (CL). With this article, I am adding Intel (INTC) to this elite group of companies.
Company Basics
Intel is the largest semiconductor chip maker accounting for more than 80% of worldwide microprocessor revenue. According to TREFIS, the company can be broken down into eight major revenue sources which are as follows:
- Notebook Processors (46.7% of stock price)
- Server Processors (22.7% of stock price)
- Desktop Processors (11% of stock price)
- Mobile Chipsets (9.4% of stock price)
- McAfee Security (2.6% of stock price)
- Desktop Chipsets (2.1% of stock price)
- Atom Processors (1.9% of stock price)
- Ultramobile Processors (1.4% of stock price)
The company derives majority of its income from Asia. In the year 2009, 20% of the revenue was generated in Americas, 15% in Europe, 10% in Japan, and 55% in Asia-Pacific. Being in a competitive business, Intel spends a substantial amount on R&D to stay ahead of the curve. Over the last few years, the company has been averaging $5.7 Billion in R&D expense. This expense has paid off in my opinion in the form of technologically superior chips that Intel produces today.
According to the latest available information, the company had approximately $21 Billion in cash, short term investments and tradable assets, and had approximately $2 Billion in long term debt. Unlike most technology companies, INTL pays a healthy dividend. The stock currently yields 3.2%.
Fundamentals/Earnings
- Market Cap = $107 billion
- Sales (TTM) = $42.73 billion
- Income (TTM) = $ 10.6 billion
- Net Profit Margin = 25%
- LT Debt to Equity ratio = 0.04
- Return on Equity (TTM) = 24%
- Return on Equity (Last 5 Yrs) = 16%
- Return on Assets (TTM) = 19%
- Return on Assets (Last 5 Yrs) = 12%
- Current Ratio = 3.34
- TTM EPS = $1.86
- Average Analyst 2011 EPS Estimate = $1.93
- Average Analyst 2011 EPS Estimate = $1.88
Discounted Cash Flow Valuation
DCF valuation of INTC was performed by employing a two-stage model with a high growth period of 10 years. It should be noted that the assumed growth rate for the high growth period was calculated by blending my growth rate estimates based on fundamentals (8.2%) with analyst average long term growth rate of 12.3%. Additionally, since INTC has significant R&D expenses which in essence serve as a capital expenditure, these expenses were capitalized. The major inputs and the valuation results are presented below.
INTC | |
High Growth Period | |
Bottom-Up Beta for High Growth | 1.81 |
Equity Risk Premium | 6.5% |
Cost of Capital (Years 1 to 5) | 14% |
Average Cost of Capital (Years 6 to 10) | 11.3% |
Growth Rate (Years 1-5) | 10% |
Average Growth Rate (Years 6-10) | 5.5% |
Stable Growth Period | |
Bottom-Up Beta for Stable Growth | 1.2 |
Equity Risk Premium | 6.5% |
Cost of Capital | 9.5% |
Growth Rate | 2.5% |
Valuation | |
Present Value of FCFF in High Growth Period (Billions) | $50.8 |
Present Value of Terminal Value of Firm (Billions) | $63.8 |
Cash, Marketable Assets and Non-Operating Assets (Billions) | $25.3 |
Total Firm Value (Billions) | $140 |
Outstanding Debt | $2.3 |
Market Value of Equity | $137.7 |
Market Value of Equity/Share | $24.7 |
Relative Valuation
The estimated fair value using various relative valuation methods is presented below. It should be noted that the historical data was relied upon to develop the estimates shown below. Adjustments were made to account for outliers present in the dataset.
INTC | |||
Current | Estimate | Fair Value | |
P/E | 10.4 | 13.0 | $24.2 |
P/S | 2.5 | 2.8 | $21.4 |
P/B | 2.3 | 2.3 | $19.2 |
(P/E) / (P/E – Peers) | 0.55 | 0.59 | $20.9 |
(P/E) / (P/E – S&P 500) | 0.54 | 0.64 | $23.0 |
Average | $21.7 | ||
Fair Value
By combining the fair value estimates from my DCF and relative valuation, the fair value of Intel is $23.2 a share. As of October 13, 2010, the stock was trading at $19.24 implying a discount of approximately 17%. My 12-month price target of $22.5 derived by applying a P/E of 12 to average analyst 2011 EPS of $1.88, yields a total return of approximately 18%.
(Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.)
Disclosure: Long MSFT. I plan on opening a position in INTC if and when it trades below $18.5/share resulting in a total return potential of 25%, based on my 12-month price target.
