What Is Intel Really Worth?

With Intel (INTC) failing to shine, even though it controls the high-gross margin server market and even though rival Advanced Micro Devices (AMD) is barely alive, there would appear to be one simple conclusion: The chip business, years after the boom in the late 1990s, is really just another cyclical industry that investors cling to as if it were still in its growth heyday.

What’s a cyclical business worth? Certainly not a premium to the market; the S&P 500 trades at about 15.6 times this year’s expected earnings. Cyclicals tend to trade at a discount to the market. Caterpillar (CAT) trades at 10.8 times; Applied Materials (AMAT), 13-times (assuming the estimates aren’t already too high.)

Give Intel a slight premium to those companies for the strength of its name and its dominance, and you get around 14-times earnings. Before yesterday's earnings, the street was expecting Intel to earn $1.51 per share this year. That would get a price of $21. But considering over the past five years Intel has earned less than $1 a share, on average, with a multiple of 14-times, it could be argued that Intel is more like a $14 stock. Will it get that low? Don’t know, but it fell 14% in after-market trading, which might suggests that 14 is its unlucky number.

But to be fair and balanced (as if I would have it any other way) Intel fan Paul McWilliams of Nextinning.com, told his clients that based on the guidance provided by Intel, he could see the company earning $1.59 per share. “Not only does that top the consensus,” he says, “but it implies 16% earnings growth in spite of the fact that we’re using a 31% tax rate for 2008 versus the less than 24% rate used in 2007. On a pre-tax basis, my back of the envelope calculation is that INTC will post somewhere close to 30% year-over-year earnings growth. If that’s bad, I want more bad.”

He adds:

If we look at the after-hours price of INTC and assume my forward earnings calculation is reasonably accurate, it implies Wall Street thinks the largest semiconductor company in the world that will grow before tax earnings nearly 30% this year is worth only about 12 times my EPS estimate. If we deduct the nearly $6.50 in net tangible assets from the price, the valuation is only about 8.5 times my forward earnings estimate. I think given a reasonable investment horizon, buying INTC here will prove to be a very rewarding decision.

Assuming he’s right.

Comments

[SmartGuySto...:]

Wow. I am very disappointed with this one, Herb. Anyone who knows anything about investing knows chips are HIGHLY cyclical. Even the Buffettology books use INTC as an example of cyclical companies for which you DO NOT want to pay a premium.

Go back to digging up shenanigans by sourcing your contacts ... otherwise you will quickly lose your premium too.

2008 Jan 16 10:59 AM

[Al from CT:]

The cost of each high end semiconductor fab is somewhere north of $4 billion. The current microprocessor is one of the most complex systems ever designed. The only other real player is AMD, and they don't have enough of those $4B fabs to supply the market, nor deep enough pockets to build more. It is hard to imagine any product line with higher barriers to entry. Intel is a different sort of company.

2008 Jan 16 05:19 PM