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Intel (NASDAQ:INTC) is a household name and is a designer and manufacturer of integrated digital technology platforms. These platforms are sold to OEMs and ODMs in the computing and communications industries. The company is divided into 5 operating segments with PC Client Group responsible for 66% of all revenues. The PC Client group offers products that are an integral part of the notebooks and desktop computers. Last year, the company generated revenues of $54 billion compared to the 2010 revenues of $43.6 billion.

The company has a market capitalization of $138 billion and had a debt to equity ratio of 16%. The stock is up 32% over the last year compared to the 12% returns of the tech heavy NASDAQ index. Intel is also a leader when it comes to dividends with the stock yielding a healthy 3.1%. In this article, I will perform valuation analysis to determine the fair value of INTC stock.

I started my analysis by reviewing the historical growth rates for INTC. These are shown in the table that follows:

Growth Rates

3 Year

YOY

QOQ

Revenue

15%

24%

21%

Income

31%

13%

6%

EPS

31%

20%

16%

The company has very healthy growth rates in revenue, income and EPS. However, the growth rate is decelerating as evidenced by a comparison of the year over year and quarter over quarter growth rates. Going forward, consensus estimates call for a long term growth rate of 9%, slower than the 15% growth rate of the semiconductor industry on the 11% projected growth rate of the S&P 500 index.

Next, I evaluated the company's profitability and operational metrics which are shown in the table that follows. The table below presents a wonderful picture with the margins and the returns on equity and assets all increasing during the last 3 years. The company is in great shape in my opinion.

Profitability & Operations

3 Year

1 Year

TTM

Gross Margin

61%

63%

63%

Operating Margin

28%

32%

32%

Net Margin

21%

24%

24%

Return on Equity

21%

27%

27%

Return on Assets

16%

19%

19%

To compare INTC's performance to that of its peers, I evaluated the margins and operational aspects of some of the other companies in the semiconductor industry. Advanced Micro Devices (NYSE:AMD) is INTC's primary competitor with the two companies dominating the PC segment. Other competitors/peers included for analysis are Texas Instruments (NASDAQ:TXN), Broadcom (NASDAQ:BRCM) and NVIDIA Corporation (NASDAQ:NVDA).

Ticker

Market Cap

P/E

P/S

Lt D/E

ROA

ROI

GM

OM

INTC

137.19B

11.46

2.54

15.43

19.27

22.92

62.51

32.12

AMD

5.42B

11.88

0.83

96.04

0.06

0.09

44.76

2.33

TXN

36.65B

17.07

2.68

38.45

13.19

15.74

49.30

21.78

BRCM

20.08B

22.37

2.46

18.34

10.92

12.69

50.93

12.90

NVDA

8.77B

15.19

2.26

0.52

11.57

14.22

51.44

16.22

Average

15.59

2.15

33.76

11.00

13.13

51.79

17.07

As shown in the table above, INTC handily beats all of its peers. The mark of a great firm can be especially seen in the margins. INTC's margins are light years ahead of AMD and the other companies on the list. In spite of this operational superiority, INTC trades at a discount to the peer average P/E.

Valuation:

Valuation analysis was performed using residual income analysis. The analysis included three scenarios which are identified below:

- Optimistic Scenario: In this scenario, I assumed that INTC would report 2012 and 2013 EPS meeting the high end of analyst expectations. A growth rate of 11% was assumed for the next 5 years beating market expectations.

- Realistic Scenario: This scenario is based on my expectations. I started my analysis in this scenario employing the average 2012 and 2013 EPS estimates. A long term growth rate of 9% was used as part of this analysis.

- Pessimistic Scenario: In this scenario, I assumed that the company would miss average forecasts for 2012 and 2013 and report an EPS matching the low end of analyst expectations. A long term growth rate of 7% was assumed as part of this analysis.

A cost of equity of 11% and a stable growth rate of 3% was applied in the case of all three scenarios. The analysis results are present below:

Optimistic Scenario:

EPS 2012 - $2.6

EPS 2016 - $4.2

PV of Residual Income = $8.4

PV of Terminal Value = $22.5

Existing Book Value = $9.2

Intrinsic Value = $40

Realistic Scenario:

EPS 2012 - $2.4

EPS 2021 - $3.4

PV of Residual Income = $6.4

PV of Terminal Value = $16.0

Existing Book Value = $9.2

Intrinsic Value = $32

Pessimistic Scenario:

EPS 2012 - $1.5

EPS 2021 - $2.7

PV of Residual Income = $4.1

PV of Terminal Value = $11.3

Existing Book Value = $9.2

Intrinsic Value = $25

As shown in the above, INTC's fair value is in the broad range of $25 to $40. Using my realistic scenario based intrinsic value of $32, the stock trades at a discount of 14%. I would wait for a pullback and build a position in this 'best-of-breed' company from the $25 levels.

Disclosure: Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.

Source: Intel: This Best-Of-Breed Technology Company Trades At A Discount