Intel (NASDAQ:INTC) shares have had a rocky 52 weeks, bouncing between $19 and $29. Shares have been hit based upon the "death of the PC" argument and the idea that Intel will not be able to reinvent itself in order to compete in the new world of mobile computing. In a bit of good news for INTC shareholders, the stock has moved four dollars off of the lows set last winter. Given this information, is the move up over for INTC? This article will take a look at Intel's valuation in relation to its prospects and determine whether or not shares deserve your capital.
To determine a fair value for INTC shares, we'll use a DCF-type analysis that requires some assumptions: 1) book value and analyst growth rates from Yahoo! Finance 2) perpetual growth rate of 4% (my estimate) 3) dividend growth rate of 8% per annum (my estimate) and finally 4) discount rate of 10% (my estimate). Of course, you may disagree with some or all of my estimates but I used what I believe to be reasonable approximations for Intel's prospects given available information. Keep in mind that all forecasting is subject to conjecture.
2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||
Earnings Forecast | |||||||
Reported earnings per share | $1.88 | $2.03 | $2.25 | $2.50 | $2.78 | ||
x(1+Forecasted earnings growth) | 8.00% | 11.00% | 11.00% | 11.00% | 11.00% | ||
Forecasted earnings per share | $1.88 | $2.03 | $2.25 | $2.50 | $2.78 | $3.08 | |
Equity Book Value Forecasts | |||||||
Equity book value at beginning of year | $10.36 | $11.27 | $12.25 | $13.37 | $14.65 | $16.10 | |
Earnings per share | $1.88 | $2.03 | $2.25 | $2.50 | $2.78 | $3.08 | |
-Dividends per share | $0.90 | $0.97 | $1.05 | $1.13 | $1.22 | $1.32 | $1.43 |
Equity book value at end of year | $10.36 | $11.27 | $12.25 | $13.37 | $14.65 | $16.10 | $17.75 |
x Equity cost of capital | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | |
Normal earnings | $1.13 | $1.22 | $1.34 | $1.46 | $1.61 | $1.78 | |
Forecasted EPS | $1.88 | $2.03 | $2.25 | $2.50 | $2.78 | $3.08 | |
-Normal earnings | $1.13 | $1.22 | $1.34 | $1.46 | $1.61 | $1.78 | |
Abnormal earnings | $0.75 | $0.81 | $0.92 | $1.04 | $1.17 | $1.31 | |
x discount factor (10%) | 0.909 | 0.826 | 0.751 | 0.683 | 0.621 | 0.564 | |
Abnormal earnings disc to present | $0.68 | $0.67 | $0.69 | $0.71 | $0.72 | $0.74 | |
Abnormal earnings in year +6 | $0.74 | ||||||
Assumed long-term growth rate | 4.00% | ||||||
Value of terminal year | $19.16 | ||||||
Estimated share price | |||||||
Sum of discounted AE over horizon | $4.21 | ||||||
+PV of terminal year AE | $10.81 | ||||||
PV of all AE | $15.02 | ||||||
+Current equity book value | $10.36 | ||||||
Estimated Current share price | $25.38 |
Given my model's inputs, Intel has an approximate fair value of $25.38 today. With shares trading at $23.01 as of this writing, shares are trading at a nearly 10% discount to my fair value estimate. It is important at this point to understand what the fair value estimate means. The model's output is a price at which, given the parameters specified, shares can be bought at a "good price" today. The estimated fair value is the net present value of the company's cash flows plus its current book value. Therefore, the fair value of the business today, according to my estimates, is about 10% higher than where shares are trading.
There could be many reasons for this discrepancy. For instance, indices are near major highs, fears about Intel's inability to adapt to the new computing market that is focused heavily on tablets and smartphones, fears about IT spending in general going forward and others are all valid risks for the stock. However, with a 10% estimated cushion, some of these fears are probably priced in already. In addition, it is important to note that $25.38 is not a nominal price target; rather, it is the net present value of all the company's estimated future earnings and current book value. Given Intel's current forward PE of 11.3, if the company achieves $3.08 in earnings per share in 2018, a price of nearly $35 is implied with no multiple expansion.
In addition, my model is forecasting that over this same period, shareholders will receive something like $7.12 per share in cash dividends, or 31% of the current share price. This offers huge downside protection in the shares and provides tons of current income in the process.
There are risks, of course, to my estimates. First, Intel may not hit the lofty goal of 11% earnings growth annually. If that does not happen, there is potentially significant downside risk to my fair value. For instance, if only 5% earnings growth is achieved, the fair value decreases to about $21, imply INTC is quite overvalued. If no earnings growth is achieved whatsoever, in a sort of Armageddon scenario, look out below as it will get ugly for holders of the stock. However, given the fact that shares are very attractively priced with a reasonable 10% discount rate and the enormous amount of dividends that are due shareholders in the coming years, I believe the margin of safety is large enough to warrant taking the risk at this point. Also remember that this analysis assumes no share repurchases and INTC is perpetually engaged in buybacks so that could be an additional tailwind for EPS in the future. Given the fact that the bottom was clearly put in at $19 and the strong move up since then, investors can be confident that, barring some exogenous shock, Intel shares are set to churn higher. The combination of share repurchases, dividends, earnings growth and current cheap valuation means Intel shares have a large enough margin of safety to mitigate future earnings risk. Indeed, Intel even borrowed money recently in order to further reduce the float of common shares, boosting EPS in the years to come and offering further downside cushion to shareholders.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INTC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.