Shares of Intel Corporation (NASDAQ:INTC) have plunged 10.88% over the past 12 months. At $21.95 per share, the stock is currently trading very close to its 52-week low of $21.22 touched just recently. In this article, I will take different perspectives to measure the stock's margin of safety, and hopefully the ideas presented below will help in formulating your investment decisions.
From a relative valuation perspective, INTC appears to be reasonably valued, based on the company's financial performance relative to its peers (see table below). Comparing to a peer group consisting of INTC's competitors such as Advanced Micro Devices (NYSE:AMD), ARM Holdings (NASDAQ:ARMH), and Texas Instruments (NASDAQ:TXN), growth prospects are the company's significant weakness.
INTC's revenue is forecasted by the market to grow at just a 2-year CAGR of 0.7% over the current and next fiscal years. Its EBITDA and EPS are predicted to drop at the rates of 3.8% and 9.1% over the same period. The weak estimates are significantly below the peer-average growth estimates of 6.9%, 15.3%, and 9.2% for revenue, EBITDA, and EPS, respectively.
In addition, INTC's EBITDA margin is expected to shrink by 3.8% in two years, compared to an average expansion of 1.2% for the peer companies. However, on the profit side, INTC is still more profitable. All of the company's trailing profitability margins and capital return measures are substantially higher than the peer averages.
It should be noted that INTC's trailing EBITDA margin, ROE, and ROIC are the highest in the peer group. The large profitability gap should allow the company to remain more profitable than the peer averages even after accounting for the expected EBITDA margin decline. In terms of leverage and liquidity, INTC assumes a very low level of debt as reflected by the company's below-average debt to capitalization and debt to EBITDA ratios.
Due to its high profitability and the low leverage, INTC was able to maintain a very high interest coverage ratio. However, both the firm's current and quick ratios are below the par, reflecting a mediocre balance sheet.
To summarize the financial comparisons, INTC's weak growth potential should be the primary drag on the valuations. However, given the company's robust profitability, I believe the valuation discount should not be substantial. The current stock's valuations at 2.0x EV/sales, 5.0x EV/EBITDA, 2.0x P/S, 11.0x P/E, and 2.2x P/BV (all on a forward basis, except for P/BV) represent an average valuation discount of 41% to the peer-average trading multiples (see table above), suggesting a fairly cheap valuations.
Moreover, INTC's trailing EV/EBITDA multiple has been underperforming the same valuation multiple for the S&P 500 index since late 2009, and it is currently trading at a 45% discount (see chart below). The substantial valuation discount to the market should have fully reflected the INTC's growth weakness. It should also be noted that according to Capital IQ, INTC's estimated long-term earnings growth rate of 9.26% is higher than the average estimate of 7.93% for the S&P 500 companies.
INTC currently offers a tempting dividend yield at 4.1%, which is believed to be safely backed by the company's solid free cash flow and commitment to continuously raise the dividend. Since FY2006, the annual dividend per share had been raised by a 5-year CAGR of 14.4% from $0.40 in FY2006 to $0.78 in FY2011. Despite a slowdown in FY2009, the dividend growth has regained momentum since then (see chart below).
Additionally, INTC's annual dividend payment historically represented less than a half of the annual free cash flow, implying that there remains an ample slack for future dividend hikes (see chart below).
According to a 5-year dividend yield chart shown below, the stock's dividend yield has rarely exceeded the 4.5% level. I believe that under the current low-interest market environment, as long as the dividend yield rises beyond the 4.0% level, it would attract a substantial demand from the income-oriented investors. Therefore, assuming a fairly high target yield of 4.5%, and supposing that the current annualized dividend of $0.9 per share would be raised by 10% (a conservative assumption given the historically higher dividend growth rates) to $1.0 in the August 2013 payment period, the conservative scenario would imply a stock value of $22, indicating that INTC is downside protected by the future dividend growth and the high dividend yield.
In terms of the ongoing migration from PCs to mobile devices and the stiff competition from the industry peers like ARM, I believe the market's concern that INTC is losing the ground is overblown. Morningstar's senior stock analyst, Andy Ng, wrote in his recent research note:
"No matter how successful Intel ends up faring against ARM in tablets, we believe the mass proliferation of these devices will ultimately be beneficial to Intel. The emergence of tablets is part of the trend toward cloud computing, where computing tasks are offloaded onto the "cloud" and users access the cloud with an interface such as a tablet. As adoption of tablets and other mobile devices continues to rise, it will require substantial server build-outs to create the infrastructure necessary for the cloud. This will provide significant long-term tailwinds for the growth of Intel's server processor segment, which is the firm's most lucrative business."
Bottom line, INTC's downside is limited by its low valuations, high dividend yield, and expected solid dividend growth. In the light of the favorable risk/reward investment profile, I recommend acquiring the shares now.
Comparable analysis table is created by author, all other charts are sourced from Capital IQ, and all financial data is sourced from Morningstar, Thomson One, and Capital IQ.