Intel Corporation (INTC) is a US based semiconductor chip maker corporation with a business record since 1968. Intel operates in a variety of segments including micro processors, controllers, memory, chipsets and other computer related technology. With a market capitalization of $136.8 billion it is the largest semiconductor company amongst its closest peer group consisting of AMD (AMD) and Texas Instruments (TXN).
Intel has reported Q1 2012 numbers in April which presented a mixed picture with revenues at $12.9 billion, down 7% from its Q4 2011 level and EPS down 17% from $0.64 to $0.53 in Q1 2012. Expanding the time horizon and looking at the bigger picture, however, shows that Intel has steadily increased revenues and earnings during the recent recessionary period from 2008-2011 and continued to remunerate shareholders with cash dividends and share repurchases. Company financials show, that revenues increased with a CAGR of 12.8% from $37.6 billion in 2008 to $54 billion in 2011. I always prefer to look at the growth rates in revenues and earnings during periods in which the economy is under stress, as macroeconomic conditions usually put the company and its financials to a test. During the same period, the company increased total earnings to common shareholders 34.7% annually which seems to me to be a reasonably well earnings record given the economic challenges that prevailed throughout the most recent four year period. The PC client and data center group were largely responsible for driving the growth rates.
One of the reasons I am bullish about Intel is an investment made by Warren Buffet who, in 2011, initially committed $200 million dollars to buy Intel shares and continued to buy throughout the remainder of the year. Shares have appreciated nicely since Warren's investment made headlines as investors saw Warren's investment as a confidence vote. Since he has an extraordinarily skilled hand in making well-timed, long-term oriented investments, the stock caught my interest. Intel stock currently stands at $27.37 and had a runup that picked up steam once Buffet disclosed his stake. Since then investors buy on weakness in the stock and keep driving it higher.
Valuation
According to Yahoo Finance, INTC has a forward P/E, based on 2013 earnings, of 10.2 and a P/B of 2.93. Since I consider INTC suitable more for growth-oriented investors, P/B ratios, especially in technology, are higher than for deep value investments. Analysts' 2013 average earnings estimate is $2.68. With a multiple of 10, the stock theoretically would be fairly valued at around $27. However, I disagree with the multiple the market currently assigns to market leading, high-profitability companies with great growth prospects. I consider a multiple of 15 more appropriate for Intel. Stock returns going forward will be driven by earnings growth on the one hand, and multiple expansion on the other. Once investor fund flows indicate that equities are the more suitable investment option regarding a broad market-based chase for yield, multiples are going to increase. In addition, the company pays out over 30% of its income as dividends sporting a dividend yield of currently 3%. Main value generation for shareholders is likely to come from growth rather than dividends but certainly investors can pick a yield above what Treasuries pay on the way.
According to my EPS estimates which are largely based on INTC historical CAGR, I predict a 2014 EPS of $3.00 per share indicating an intrinsic value of $45 per share.
Disclosure: I am long INTC.
