In my last article, I illustrated how much Cisco (CSCO) is undervalued under my DCF model. I applied the same model template to Intel (INTC) and found that the stock is also trading at a discount to its fair value, although to a less significant extent than in the case of Cisco.
Street analysts have modest estimates for both revenue and EPS growth in the current and the next fiscal year. EBIT margin is expected to be slightly lower, but much higher than the company's 5-year historical average of ~27%. The data is summarized below:
Now let's turn to the DCF. My model has 10 discrete projected periods, plus a terminal year. I started with a baseline case, which incorporates consensus profitability and growth estimates into the model. The baseline case yields a stock value of ~$34, which is ~30% above the current stock price of ~$26. Assumption details are summarized below:
Again, to stress test the stock price and assess the priced-in profitability and growth prospects (just like what I did for CSCO in my last article), I ran the model again with the following key assumption changes to arrive at the current stock price of ~$26:
- Revenue is assumed to grow at 4% in 2012-2016, then 2% to 3% in 2017-2021;
- Operating margin is lowered to 26%; and
- WACC is increased to 11%.
As you can see, INTC's key assumptions do not require much negative revision to yield the current stock price. In the CSCO case, its current stock price has factored in much worse prospects compared to Street's consensus estimates.
The primary reason that INTC is trading at a discount is attributable to the company's lack of strong presence in the mobile world, despite its dominance in the PC processor market. The good news is that INTC has already in the late development stage of multiple smartphone chips that are scheduled to be released in 2013 and 2014. This is a near-term catalyst for potential stock outperformance, as it will likely demonstrate INTC's ability to seize market shares from its mobile peers, such as ARM Holdings (ARMH). The market may have appreciated this potential so that INTC's stock discount is less deeper compared to the significant discount on CSCO, which lacks a foreseeable near-term catalyst.
Based on above reasoning, I consider INTC is a safer bet due to the near-term catalyst, even though it appears to be less undervalued than CSCO.
Notes: Charts and exhibits have been created by the author. Financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Morningstar, and Thomson One.