Why Intel Is Extremely Undervalued

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Intel (NASDAQ: INTC) had a tough year last year. Sales slowed due to many corporations tightening up their spending as a result of uncertain economic conditions. However, when looking at the larger picture, it is very clear that the average consumer is using more and more technology and devices. Also, while Intel's sales did slow a little last year they are still the stand out leader in the semiconductor industry and they continue to expand into other areas. Their latest branding of the term "Ultrabook" has allowed consumers to quickly see which laptops are the fastest and slimmest on the market.

With these facts in mind, I decided to do a mulitples analysis to see if Intel's stock was trading in line with the industry standards. In choosing Intel's competition in the semiconductor industry I decided to use a more systematic approach, which included looking at the holdings of some of the larger semiconductor indexes and choosing the largest holdings. Notable competitors included: Texas Instruments (NASDAQ: TXN), Sandisk (NASDAQ: SNDK) & Nvidia (NASDAQ: NVDA). These three companies continue to innovate and create new products, and while Intel is definitely a more mature company, they still have the ability and resources to compete and beat their competitors in a number of different arenas.

All three of these competitors are trading at substantially higher multiples then Intel. This could be due to them all being smaller companies then Intel and the market assuming that there is a larger growth opportunities for a smaller firm, however, I take this as a sign that the market is undervaluing Intel. See comparables table below:

<img src="/media/images/user_4137/intc_large.jpg" />

The most relevant multiples are the EV/EBITDA, the P/E and the Forward P/E. These just so happen to be the three multiples that portray Intel as the largest value as well. EV/EBITDA is the most common valuation multiple used by professionals and it measures how many times a company’s operating pretax income can be divided into the company's enterprise value. Enterprise Value is comprised of a firm’s market capitalization plus net debt. I also completed a rough discounted cash flow model which confirmed the results of the multiples analysis. All signs point to Intel being an excellent value currently. This conclusion is strengthened by the fact that Intel is currently paying a +4% dividend and also given current macroeconomic conditions which seem to be improving.

Barclays’ recently came out with an Equal Weight call on Intel, and is expecting a price drop from $22 down to $20. Large banks often come out with these calls when they see a value in the market. They attempt to push an oversold stock which appears to be a good value down a little bit further, so that they can get in at a better price. Meanwhile, the semiconductors seem to be forming a nice technical bottom, and could potentially have a very strong 2013.

Intel's earnings are coming up later this week and I have developed an interesting hypothesis which seems to be a win-win scenario for the stock. While Intel's results may not meet or beat analyst estimates, I am convinced that at the very least their outlook and guidance will be strong. This offers a chance of one of those phenomenon when a company does not meet its earnings target but still goes up based off of valuation and forward guidance. The company continues to innovate and I have heard rumor of a device that will compete with Apple TV. Per my analysis, I feel confident placing a buy rating on Intel with a price target of $32.50.

MastodonCap is long INTC. The Motley Fool recommends Intel Corp. The Motley Fool owns shares of Intel Corp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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