We have long been an investment advisor that focuses as much on the Statement of Cash Flows for the companies we own for clients, as we do the Income Statement and the Balance Sheet.
In fact the Statement of Cash Flows is the financial statement that brings the Income Statement and Balance Sheet together in one neat summary (at least it gives me, what i want to see).
We updated our Intel (INTC) spreadsheet over the Memorial Day weekend and saw that "ex-cash", INTC is trading at 5.07(x) price to cash-flow and 10.3(x) price-to-free-cash-flow.
Here is the math:
Share Price: $24 (May 24th, 2013, close)
Market cap: $119 billion
Cash & Investments: $17.07 billion
4-quarter trailing cash-flow: $20.1 billion
4-quarter trailing free-cash-flow: $9.9 billion
$119 billion less $17.07 = $101.93 divided by $20.1 = 5.07(x) cash-flow.
$119 billion less $17.07 = $101.93 divided by $9.9 = 10.3(x) free-cash-flow.
We've never seen INTC this cheap on a cash-flow valuation basis, with the exception of last quarter, when, with the stock trading near $21, the price-to-cash-flow valuation for Intel was 4.7(x) "ex-cash".
Our internal valuation model values INTC at $44, while Morningstar puts an intrinsic value on INTC of $26, so if we split the difference we get $35 per share, on a mid-range valuation matrix.
Since INTC has very demanding capex requirements which consume half their cash-flow over long periods of time, we discount the valuation of INTC even further, which gets us to $30 per share, or an "expected" 25% return from INTC's current price. (This is obviously an opinion, and not a prediction.)
In addition, a near 4% dividend yield and an 8% "free-cash-flow yield" are also compelling metrics, and cash is cash, or rather cash-flow is cash-flow, and not GAAP (Generally Accepted Accounting Principles) earnings, or net income.
The problem today is that sell-side analysts are still cutting numbers on INTC in terms of 2013 EPS (earnings per share) estimates. Full year revenue estimates are getting trimmed as well, given the year-over-year unit growth declines of the PC business.
However, we should start to lap better Personal Computer (PC) unit numbers as we enter the 2nd half of 2013, as the 2nd half of 2012 with the launch of Windows 8, was really when we started to see PC numbers and estimates start to fall quickly.
INTC is a true value stock - the opposite of the story in late 1999, and as always it is always tough to put money into a stock when the estimates and trends look the way they do.
Deutschebank, in a recent research note dated April 26th, thinks Intel is rapidly gaining tablet market share. Per the same note, INTC is thought to have product for both the Win8 and Android markets, with the caveat being that the PC business is still 70% and 83% of INTC's total revenues and operating income respectively.
This is the downside to value investing: sometimes it requires a lot of patience, and sometimes it becomes "value-trap" investing.
Let's see if the new CEO Brian Krzanich can jump-start INTC's stock.
The cash-flow valuation is at rock-bottom in our opinion. We think the 2nd half of 2013 is the do-or-die period for the company, and we think the guidance for 2h '13 on the July '13 earnings call will be critical.