Intel: Vindication - Small Today, More Tomorrow
- Intel's strong operational performance is not being reflected in its share price.
- Will Intel be increasing its buybacks at year-end?
- Intel is undervalued however a rational investor looks at it.
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Intel (NASDAQ:INTC) is a reasonable company, with a market leading-position in the CPU market. It has largely succeeded in pivoting away from a PC-centric business towards becoming a data-centric business. While Intel has its faults, its share price remains unjustifiably undervalued.
Market Sell-Off - Vindication
During the market-wide sell-off of the past few days, Intel's valuation has remained stable. Furthermore, particularly during the past 2 months, with tech in general, seeing a lot of weakness in share prices, Intel has actually outperformed the Nasdaq. Why?
It is my contention that value investing has started to make its way in underpriced pockets of opportunity in the market. Given that Intel had already made for a difficult investment during the early part of 2018 - least of all, by having no permanent CEO to head the company - now as the market starts to sell-off and Intel has been so underpriced for so long, it would not surprise me to see Intel's valuation better reflected its medium-term opportunities.
A Different Story - Diversified Growth
Here is a fact: Hidden amongst the news from Nvidia's (NVDA) sell-off post earnings comes the reality that its datacenter segment was up 58% YoY for Nvidia.
Obviously, Nvidia's datacenter opportunity is very much smaller than Intel's, but it goes to show still more solid evidence that this sector's tailwinds are strong and not showing any signs of slowing down.
Moreover, many analysts underestimated just how quickly Intel would manage to lessen its hold on the PC-centric market and pivot strongly towards the now, more promising data-centric opportunity.
However, even more insightful, is that although many industry commentators continue to talk about the PC-market decline, in Q3 2018, Intel delivered solid growth in its PC-centric business which was up 16% YoY. In fact, the solid growth posted in the quarter allowed Intel to not only remain bullish this segment, it now expects to finish this segment up 9% YoY. Furthermore, it has allowed Intel to raise its guidance by $6 billion from the start of the year. In other words, since the start of 2018, Intel has revised its revenue guidance up by more than 8%.
In January of this year, Intel guided for non-GAAP EPS of $3.55. After a remarkably strong 9 months, Intel has upped its EPS guidance by a whopping 27%. And how have its shares reacted since that original announcement? Exactly, they are down 5%.
Additionally, in spite of losing Brian Krzanich as Intel's CEO, Intel still managed to increase its expectation for free cash flow, from its original guidance of $13 billion earlier in the year, to now approximately $15.5 billion.
Since Intel's balance sheet remains mostly unleveraged, with a net debt position of roughly $10 billion, I wonder whether a more aggressive accelerated share repurchase program is likely to be announced at year-end?
At the 9 months marker, Intel's total shareholder return of its combined dividend and share repurchases amounted to $12.6 billion. This is higher than the free cash flow Intel generated over the same period ($11.2 billion). Given that Intel has been a consistent buyer of its own stock during this troublesome 2018, together with the fact that Intel's top line points towards solid growth in the near term and medium term, I suspect that we will most likely hear of an updated repurchase program at the end of January.
I have already addressed the key driver of Intel's story, its valuation. Nevertheless, the table below is a further attempt to truly drive home this point.
Source: Author's calculations, morningstar.com
There is no scenario where a reasonable, rational investor will not look at the above table and spot which stock is the most undervalued.
I find it staggering, that while AMD (AMD) in the best-case scenario is pointing toward mid 20% YoY growth yet it trades at plus 400X free cash flow. And still, there are investors who believe that AMD is undervalued.
On the other hand, how can the same investors not look at Intel, which is likely to finish FY 2018 up 13% and trades for a humble 14 times free cash flow?
Intel shareholders have had a challenging year. But in the last couple of months of 2018, Intel's shareholders have been vindicated as Intel's share price has remained strong while at the same time the market weakens, with tech, in particular, seeing strong sell-offs.
Given Intel's strong operational performance during 2018, I expect Intel to increase its buyback policy at year-end. Stay tuned.
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Disclaimer: Please do your own due diligence to reach your own conclusions.
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