As a value investor, I often screen stocks with the lowest valuation among their peers as a start. Then I dig deeper into SEC filings and begin to study the business competitiveness. For the screen of this time, I notice that one of the greatest technology companies is selling for single digit valuation. That stock is Intel (INTC).
Let's have a look at its operating and valuation metrics compared to its industry peers.
Following Google Finance, its peers are ARM Holdings (ARMH), Microchip Technology (MCHP), MIPS Technologies (MIPS), NVIDIA Corporation (NVDA), BroadCom Corporation (BRCM), Freescale Semiconductor (FSL) and Advanced Micro Devices (AMD). Among this group, Intel is having the highest operating margin and net profit margin, whereas the return on average equity is the second highest, of 27.15%, only after AMD of 38%. However, the high return on equity of AMD is due to high level of leverage in its balance sheet, especially a capital leases item. For AMD, Debt/Asset is nearly 78% whereas it is only 32.5% for Intel.
Among large cap technology companies (with market cap of $35 billion or more), Intel seems to have a very competitive operating metric as well.
The company's operating margin is the second highest of 32.12%, ranking only after Oracle (ORCL) of 36.92%. Its operating margin is higher than that of International Business Machines (IBM), SAP AG (SAP), Microsoft (MSFT), and Hewlett-Packard (HPQ). Its return on average equity is lower than that of IBM, SAP and MSFT.
In the two peer table above, we can see that Intel is the only company that is trading at a single digit P/E ratio. The rest are either making a loss (which makes P/E ratio not valid) or trading at minimum 15x P/E.
In addition, Intel is trading at significantly lower than its historical valuation. At the current price of $23.3, the total market capitalization is $116.62 billion; the enterprise value is $110.2 billion. It is currently trading at 9.8x P/E, 2.4x book value and 5.9x P/CF whereas its average historical valuation is 17.1x P/E, 2.7x P/B and 8x its operating cash flow.
Intel has shown that it is a fast grower for the last 10 years. During that period, the annualized growth of Intel for revenue, net income and free cash flow is 7.27%, 15.3% and 8.7% respectively. Furthermore, Intel has been an increasing dividend payer. In 2002, it paid $0.08 per share in dividend. And in 2011, each share of Intel was entitled to $0.84 dividend payment. It experienced 26.5% annualized dividend growth from 2002 to 2011. At the moment, the dividend yield is 3.86%.
Recently, even though Intel just issued revenue warning for Q3 2012 because of the softness in the enterprise PC market segment and slowing emerging market demand, I think that has already been factored in the current stock price. If EPS 2012 was only around $2.25, the average figure that many analysts expected, Intel would be still trading at only 10.36x P/E. That valuation is still quite low compared to semiconductor valuation average of 15x.
With the current valuation and its historical growth operating performance, Intel can be considered to be a good income stock in a diversified portfolio of a value investor.