Is Now The Right Time To Buy Intel?
Summary
- The Power Factors System is a quantitative stock-picking system that has produced impressive backtested returns over the years.
- The most recent update to the Power Factors Portfolio recommends a long position in Intel.
- Intel stock is significantly undervalued in comparison to peers, the company generates superior profitability, and momentum is quite encouraging.
The Power Factors System is the main building block in my research service, The Data Driven Investor. This quantitative model basically ranks companies in a particular universe according to a combination of factors: financial quality, valuation, and momentum.
Some brief explanations about these factors:
Financial quality considers variables such as profit margins on sales and profitability on capital. All else the same, the more profitable the business the higher the returns it can generate for investors over time. We want to invest in companies that make lots of money on every sale and use shareholder capital efficiently to produce profits.
Even the best company can be a mediocre investment if the stock price is unreasonably high, so we want to make sure that we are paying a fair price for the stock. The Power Factors System includes valuation ratios such as price to earnings and price to free cash flows, among several others.
Stock prices don't just move in response to financial performance in isolation. What really has a big impact on returns is performance in comparison to expectations. For this reason, we want companies with strong financial momentum, meaning that the business is performing better than expected and earnings expectations are increasing.
The backtest picks the 50 best-ranking companies in the S&P 500 index and builds an equal-weighted and monthly rebalanced portfolio with those names. The portfolio is assumed to have an annual management cost of 1% to account for trading expenses and similar considerations, and the benchmark is the SPDR S&P 500 Trust ETF (SPY).
Since 1999 the portfolio recommended by the system generated an average annual return of 12.57%, more than double the 5.91% per year produced by the ETF. In cumulative terms, the Power Factors System gained 828.42% vs. 194.49% for the benchmark.
Putting the numbers in perspective, this means that a $100,00 investment in the SPDR S&P 500 Trust ETF in January of 1990 would currently be worth around $294,500, and the same amount of money allocated to the Power Factors System would have a current value of nearly $928,400.
All data and charts are from Portfolio123, and the complete Power Factors Portfolio is available for subscribers in The Data Driven Investor.
Case Study: Intel
The most recent update to the Power Factors Portfolio recommends buying shares of Intel (NASDAQ:INTC). The stock has lagged the market over the past five years, but things are looking much better for Intel recently. The company is outperforming expectations and the stock price is reflecting this with vigorous returns, so it may be a good time to take a look at Intel.
As the PC industry is maturing, Intel is facing a slowdown in growth over the past several years. On the other hand, the company is making big investments in promising areas such as data-centric business segments, cloud computing, and the Internet of Things, and these investments are delivering results.
Intel announced both sales and earnings numbers above Wall Street expectations during the third quarter of 2017. In sign of confidence on the future of the business, management also raised both sales and earnings guidance for the full year 2017.
Total revenue excluding the McAfee transaction increased 6% year over year, reaching $16.15 billion and beating expectations by $420 million. Revenue from data-centric businesses grew 15%, accounting for 45% of total revenue during the period. Internet of Things and non-volatile memory solutions are particularly strong segments for the company, with revenue growing 23% and 37%, respectively.
Source: Intel
Chances are that the high-growth segments will continue outperforming the rest of the business and gaining participation in the overall revenue mix over the coming years. This should have positive implications for Intel in terms of total revenue growth going forward.
The following table compares different valuation ratios for Intel vs. other industry players such as Broadcom (AVGO), Texas Instruments (TXN), NXP Semiconductors (NXP), and Microchip Technology Incorporated (NASDAQ:MCHP).
When looking at all the indicators in the table, Intel is the cheapest stock in the group based on price to earnings, forward price to earnings, price to sales, and price to book value. Only Texas Instruments comes close to Intel in terms of dividend yield among big semiconductor stocks.
PE | Fwd. PE | PS | PBV | Div Yield | |
Intel | 15.5 | 13.8 | 3.1 | 2.9 | 2.4% |
Broadcom | 214 | 14.7 | 6.1 | 5.37 | 1.5% |
Texas Instruments | 21.9 | 21.2 | 6.5 | 8.9 | 2.5% |
NXP | 20.8 | 16.1 | 4.3 | 3.1 | - |
Microchip Technology | 50.5 | 16.8 | 6.08 | 6.4 | 1.5% |
Intel is a remarkably strong company in terms of financial quality and profitability. The chart shows return on assets (ROA), return on equity (ROE), return on investment (ROI), gross margin, net margin, and operating margin for Intel vs. the average company in the sector. An image is worth a thousand words, and Intel is far superior to the average industry player.
When considering the company's financial quality, Intel stock seems to be undervalued in comparison to other companies in the sector. Granted, Intel has faced slowing growth over the past several years, but the company is making sound progress in that area, and the market is starting to recognize these improvements. If the trend remains in place, accelerating growth could drive higher valuations for Intel stock in the near term.
Fundamental momentum also is favoring the bulls. Intel has delivered earnings per share numbers above Wall Street expectations over the past four quarters in a row, so the company is showing consistency in this much important area.
12/30/2016 | 3/30/2017 | 6/29/2017 | 9/29/2017 | |
EPS Estimate | 0.75 | 0.65 | 0.68 | 0.8 |
EPS Actual | 0.79 | 0.66 | 0.72 | 1.01 |
Difference | 0.04 | 0.01 | 0.04 | 0.21 |
Surprise % | 5.30% | 1.50% | 5.90% | 26.20% |
In the context of earnings reports coming in ahead of expectations and management raising guidance, Wall Street analysts also are increasing their earnings forecasts for 2017 and 2018. Unsurprisingly, the stock price is moving in the same direction as earnings expectations.
INTC data by YCharts The main point is that Intel stock is conveniently cheap, the company makes tons of money, and earnings expectations for the business are improving. This combination of factors could drive attractive returns for investors in Intel going forward.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (57)
The stock ran up so much since earnings report, I wonder if it ran out of steam.
Also the DC group has a lot more to growth. Intel had forecasted double digit growth around 15% but they are only getting 7-8%. BK stated that it is taking longer for customers to ramp and expects better growth going forward. Then you have memory, IOT that are growing and then new markets such as AI and autonomous vehicles and 5G modems.
http://bit.ly/2h74J28
