I remember reading Andy Grove’s book, “Only the Paranoid Survive”, in 1997-1998, and thinking, this guy is as hard driving as they come. Andy Grove was, at the time, the ultimate leader of Integrated Electronics Corporation, known as Intel for short. He led Intel through the 90’s and Intel became a powerhouse.
Since 2000, Intel has fallen out of favor with the market. In 2005 Intel promoted a new CEO, Paul Otellini. A 30 year Intel employee, he came directly from Intel’s ranks, and out of their core businesses of chipsets and microprocessor division. From a leadership perspective, it is usually good to see promotion from within with decades of knowledge and leadership development shaping a CEO.
Otellini inherited a business on the edge, but he had enough foresight to cut 10,500 employees in 2006 before the major market crash, saving cash which he then reinvested in acquiring other businesses during the economic struggles since2008. These difficult decisions bode well for the man’s leadership and ability to get things right. Currently, his biggest initiative is a three billion dollar facility under development in China, preparing for this century with expanded capacity and capabilities.
The stock, INTC, has been beaten down from wonder stock to a moderate performer from 2000-2005. The stock has further suffered during the current American recession. Today, we rate it a Best Buy.
From our worldview analysis, Intel represents the genius in humankind. Intel facilitates mankind’s ability to communicate and work with data like virtually no other company in the world. As old paradigms of social, political and economic structures change the world, Intel will remain a core component, helping to process larger and larger amounts of data. It is an investment in America, but also in China, as Intel lays the ground work for its Dalian, China three billion dollar facility.
Intel has been growing equity, earnings per share, and free cash flow at increasing rates for years. My estimates place Intel’s growth rate at 15% for the coming years. It has averaged a PE of 38 for 10 years, but currently sits at a price-to-earnings ratio of only 10.86. Looking at the last 5 years, its PE has still averaged 17. The market is underpricing the value of Intel and I’m not alone in my opinion. Management at Intel is acquiring stock like crazy, increasing their holdings by 8% and not selling!
The consensus projections of growth for Intel are lower than my growth projections at 11.3%. I’ve used the more conservative analysts’ growth projection, as well as the more conservative 5 year PE valuations, to estimate a future stock price of $93.40 in 10 years. I expect and plan to make no less than 16% annual returns on my money. Intel pays a dividend of 3.32%, so we’d need capital appreciation of 12.68%. This places Intel at a solid and conservative valuation of $41.75. As of the writing of this article, the stock was priced at $21.86. With a needed margin of safety on this particular stock of 17%, Intel has a 31% spread on its current price which makes it a best buy indeed! It is like buying a dollar of value for .52 cents.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.