Intel (INTC) announced first-quarter revenue of $12.9 billion for the quarter ended March 31, 2012 on April 17. Operating income, net income and earnings per share for the quarter were $3.8 billion, $2.7 billion and $0.53 per share. On May 7 the company approved a 7.1% quarterly dividend increase to 22.5 cents a share, up from the 21 cents, boosting the payout for the third time in less than two years. This represents a yield of 3.3% at the time of this writing.
We'll take a look full year 2012 projections based on partial guidance provided by the company then share our valuation analysis.
Management provided the following 2012 guidance:
- Gross margin percentage: 64 percent and 65 percent Non-GAAP (excluding amortization of acquisition-related intangibles), both plus or minus a few percentage points.
- Spending (R&D plus MG&A): $18.3 billion, plus or minus $200 million.
- Tax Rate: approximately 28 percent down from prior expectations of 29 percent.
- High single-digit revenue growth noted in the conference call.
We see "high single-digit revenue growth" as 6% considering first-quarter results combined with Q2 projections are off to a slow start when compared with the first half of 2011. Management expects growth to pick up in the second half to meet our 6% single-digit revenue growth for the full year as detailed below.
Force 6% TL.
EPS growth is also getting a boost from a substantial reduction in the weighted average diluted shares outstanding when compared to 2011 numbers. Recent stock repurchases is as follows:
Stock Repurchased ($mil)
Shares Repurchased (million)
Average Diluted Shares Outstanding
5411(FY2011 average) 5242 for Q4
The above information allows us to construct a projected 2012 income statement (shown below).
(Click charts to enlarge)
We'll examine trends based on management's financial track record using GAAP results to highlight longer term trends while incorporating the previous data.
The following graph for EPS trends are arrived at by calculating the statistics for a trend line using the "least squares" method. This determines the line that best fits the historical data and consensus estimates.
The above represents the following trends:
EPS Growth Trend
OPERATING CASH TRENDS
The old saying "Cash is King" especially applies in the case of INTC. Why? INTC generates an abundance of cash to:
- Increase the dividend (Paid out approximately $1B in Q4 & increased annual dividend to 90 cents a share, up from the 84 cents on May 7)
- Aggressively buy back shares ($1.5B repurchased in Q4)
- Fund acquisitions
- Invest in existing and new products/initiatives (purchased nearly $3 billion in capital assets in Q4; 2012 capital expenditures estimated at $12.5B)
The above chart represents the following trends:
Operating Cash per share Growth Trend
This fair value analysis is based on management's longer term financial performance as measured by the previous data. Fair values are based, in part, on the following: Discounted cash flow, a modified Graham's intrinsic value formula and a P/E analysis. The valuation model consists of two parts.
- The discounted cash flow and the modified Graham's intrinsic value are blended to arrive at a fair value.
- A P/E analysis based on historical adjusted values.
Fair value used is the minimum value of the two parts.
Part 1: Discounted cash flow and the modified Graham's intrinsic value.
An estimated long-term EPS growth rate of 7.6% and a long-term cash per share growth rate of 12.1% were calculated from the data described above. Analysts are projecting a five-year EPS growth rate of 9.9% as of this writing. (Source: nasdaq.com)
Running these projections through our pricing model, excluding the PE analysis, produces a fair value of $34. Needless to say, the result is sensitive to changes in the growth rates as illustrated below.
Part 2: P/E Analysis
The model looks at current and past periods to calculate a limiting PE value along with growth trends and yields.
The following graph plots the historical trailing twelve month PE on a quarterly basis:
The recent trend is up after flat lining since June 2010.
The result is a maximum allowable PE of 14.5 yielding a fair value of $37. The result is sensitive to any earnings revision as illustrated below.
The DCF and Modified Graham analysis is the controlling factor in this case. Final fair value is the minimum of the two methods or $34.
RECENT TARGET CHANGES
Below is a sampling of recent analyst price targets, giving a wider view of market sentiment.
The following graph shows the prior year operating income growth along with current PE ratios for Intel and various competitors:
Intel is doing well as it relates to the competition, achieving growth as others such as Advanced Micro Devices, Inc. (AMD) and MIPS Technologies (MIPS) are struggling. Qualcomm (QCOM) and ARM Holdings (ARMH) are showing growth but Intel is leading the pack.
Is INTC an opportunity or overvalued? Probably depends on your definition for "opportunity." The stock is trading at a 20% discount to our fair value at the time of this writing. INTC represents a solid company with a pristine balance sheet, an attractive yield, growing dividend and potential for appreciation.