At Valuentum, we think the best opportunities arise from a complete understanding of all investing disciplines in order to identify the most attractive stocks at any given time. We therefore analyze each stock across a wide spectrum of philosophies, from deep value through momentum investing.
This involves performing significant valuation analysis, both on a DCF and relative value basis, as well as a assessing the firm's fundamentals (cash flow, risk, etc.), technicals and momentum indicators. The best stocks, we believe, will be attractive from a number of investment perspectives -- from value through momentum (hence our name, Valuentum). On the other hand, the worst stocks will be shunned by most investment disciplines and display expensive valuations and poor technicals and momentum indicators. Valuation and technical analysis are not mutually exclusive, in our opinion.
As part of our process, we employ a discounted cash-flow model to arrive at a fair value estimate for every company within our equity coverage universe. In Intel's (INTC) case, we still think the shares look undervaled at today's prices. Our fair value estimate for Intel is now $35 per share (was $37), nearly 25% higher than where it is currently trading. The minor tweak is a result of fine-tuning our future forecasts and accounting for a slightly higher cost of capital based on an increased risk assessment.
In the spirit of transparency, we make available our fully-populated DCF valuation models to all of our financial advisor and institutional customers here and disclose here when we first went bullish on Intel July 26 when the stock was trading under $23 per share. We were able to better pinpoint an entry point in our Best Ideas portfolio under $20 per share, however (it's now over $28 per share).
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We assume annual average top-line growth will average in the mid-single-digits over the next five years (was high-single-digits previously). We also assume that Intel will grow earnings at a mid-single-digit pace during our discrete five-year horizon (roughly no change). We expect the firm's excess returns on invested capital will fade to our estimate of its cost of capital (now 10.5%, was 9.7%) by Year 20 in our model.
Source: Valuentum Securities, Inc.
Our estimated fair value ranges between $28 per share and $42 per share. This considers the risks inherent to Intel's business as well as the future potential variability in the company's free cash flow stream. Intel has been one of the biggest generators of alpha in our Best Ideas portfolio. We'd consider adding to it on any material weakness.
Disclosure: INTC is included in our Best Ideas and Dividend Growth newsletters.