Intel (INTC) has seen its stock fall significantly over the last couple of months. Its hard to believe that such a strong company can fall so quickly. Instead of fearing the price drop, investors should take advantage of it.
To put things in perspective I decided to perform a Discounted Cash Flow (DCF) analysis. I used fairly conservative values when modeling for the future of the company.
I used an EBIT growth rate of -1%. This means that each EBIT should decline 1%. Considering that Intel has grown EBITDA nearly 73% in the last five years, a decline is still highly unlikely.
For the tax rate, I used 32%. The company's effective tax rate has been around 29%. Even if the government plans to increase taxes for corporations, Intel will most likely not be effected. There are many corporations that are paying a significantly lower tax rate that Intel and they are the likely targets for the government.
For depreciation and amortization, I used $6 billion. Last year, the company reported total D&A a little more than $6 billion. I expect this to be normal and there probably won't be any significant change going forward.
Intel typically spends around $5 billion for capex. Last year, they spent nearly $11 billion. I don't think this is going to be a trend going forward. While I do see Intel increasing capex, I don't see it being more than $9 billion.
Change in working capital has varied quite a bit each year. Since it was difficult to figure out what would be an appropriate estimate, I had to overestimate in order to get a conservative value. I used $500 million, which is more than sufficient considering most of the time, the changes have been under a $400 million. In 2008, the change was greater than a billion, which can be attributed to an increase in inventory due to the recession.
In order to understand the discount rate (WACC) Intel deserves, we need to understand the risk behind the company. Intel is a fairly strong company with a monopoly-like status. Therefore, investors believe that Intel has less risk associated with the stock. An 8% WACC is pretty generous considering Intel gets its debt significantly cheaper than that. Intel's stock is also yield 4.5%, so investors are not exactly expecting a company like Intel to deliver an 8% return annually. However, since we are conservative in our analysis, if we assume Intel has a WACC between 8%-10% at a 7.5x EBITDA multiple, Intel is clearly undervalued.
Based on the assumptions, Intel's stock should be trading at least above $22.66, but I believe it can easily trade at the 8% discount price of $24.50. Buying Intel now would be a wise choice for not only long-term holders, but also income investors. Intel is undervalued and I expect the market will realize this eventually and the stock will rise.
Disclosure: I am long INTC.