Is Intel an Intelligent Buy?

Unless your investing strategy is purely speculative (which is foolish in a bad way), you probably want to be as intelligent as possible about your investment choices.  But what constitutes intelligent investing?  One of the key requirements of intelligent investing is that you buy in for the long-run and view yourself as an owner of the company.  This means saying goodbye to emotional, panic-driven reactions to the market's sporadic ups and downs, and saying hello to long-term returns.

Does this mean you can just select a company, forgo the business/industry research, and just coast your way into an easy retirement with a buy-and-hold strategy?  Of course not.  Due diligence is a necessary step with any investment selection, but we first need to establish the right mindset--the mindset of a part-owner investing for the long haul.

So now that we've got that part down, how do you determine which companies make for an intelligent, buy-and-hold investment?  For starters, we need to look for rock-solid companies that are currently underpriced.  One of the best ways to do this is by utilizing the discounted cash flow analysis in order to determine a company's true, intrinsic value.  As this analysis calculates the total expected future cash flow generated by the firm, discounts this amount to its present value, and backs out the company's liabilities, it presents the investor with a best estimate of the company's value at a given point in time.  This amount can then be divided by the total number of shares outstanding to arrive at an estimated intrinsic value/share price.  If this amount is less than the current stock price, then the company is undervalued and therefore can make for a great investment.  Regardless of the company's stock price at that date (as it can often times be dictated by the market's irrational behavior), intrinsic values will inevitably prevail.  This is why we buy and hold.

Sound intimidating?  Don't worry, you can still make intelligent investments without utilizing the discounted cash flow analysis, but I highly recommend you take a look at the Foolish Discounted Cash Flow Wiki and at least begin to familiarize yourself with the analysis.  Until then, you can simply learn about some important metrics, which typically provide at the very least, a good indication of reasonably priced stocks.

Intel-ligent Investment?

To illustrate these metrics, let's take a look at one of the leading semiconductor companies, Intel Corporation (NASDAQ: INTC).

Intel has received a lot of press lately from analysts and investors, a lot of which is praising the company for good performance and future prospects.  However, the market appears to disagree, as the company's share price remains relatively flat and can't seem to rise above $30/share (and hasn't done so since early 2004).  So, here's the question: Is Intel worthy of all the hype and therefore representative of an intelligent investment?

In order to get an idea of whether or not Intel is fairly priced, let's see how the company stacks up to some of its primary competitors.

 *Data obtained from Fool.com

As you can see, Intel appears to be outperforming most of its peers in regards to revenue growth and gross margins, although it isn't doing nearly as well as QUALCOMM.  QUALCOMM has almost double the 5 year revenue growth of Intel and higher gross margins.  QUALCOMM also has a much lower debt to equity ratio, although Intel's isn't necessarily problematic.

What about pricing?  Again, without utilizing a discounted cash flow analysis, it's much more difficult and subjective to determine if a company is over or underpriced, But one common way to at least guage whether a company is priced well is to compare the company's P/E ratio to its competitors.  By doing this above, you can see that Intel's price appears much more attractive than that of its peers (one of the reasons, in addition to strong revenue growth, that I believe analysts are attracted to Intel). 

However, using a P/E ratio alone isn't enough because of the varying degree of judgment and manipulation GAAP earnings are susceptible to.  If you remove that component and evaluate Intel's price to free cash flow, which gives us a much better indicator of how well companies are priced relative their operating performance, you see that Intel is no longer the cheapest.  It's definitely not the most expensive either, considering that QUALCOMM's P/FCF is more than 3 times that of Intel's.  However, even in evaluating Intel's P/FCF on a standalone basis, it's hard to justify paying roughly $32 for every $1 of free cash flow.  A good rule of thumb to begin your analysis is to look for companies priced at or below 15x FCF, but Intel is currently trading at 2 times that.

Foolish Takeaway

Based on a quick comparison of Intel and its competitors with the metrics used above, I'm not sure the numbers justify Intel as an intelligent investment.  Sure, the company is growing and has tremendous potential if it successfully executes its strategy and adapts to the rapidly changing computing market.  But if you ask me, there's just too much uncertainty around whether Intel will actually be able to transition into a market that already has some big players in it.  As for now, the jury's still out and I'll hold off from deeming Intel an intelligent investment.