Time to Discount Intel?

By Matthew McMichen - July 11, 2012 | Tickers: AMD, INTC, NVDA, QCOM, TXN | 0 Comments

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Last week I wrote a post in which I provided a basic analysis and comparison of Intel (NASDAQ: INTC) and some of its major competitors.  Based on the P/E and P/FCF ratios, I suggested that perhaps Intel wasn't priced perfectly for a safe, high-yield investment.  

When comparing Intel’s P/E of roughly $11.10 to the 18.33 of Texas Instruments (NASDAQ:TXN), the 16.50 of Qualcomm (NASDAQ: QCOM), and the 16 of NVIDIA (NASDAQ: NVDA), it appears that Intel is underpriced.  However, with Intel’s P/FCF of roughly 32.60 compared to the 31.10 of Advanced Micro Devices (NYSE: AMD), the 33.50 of NVIDIA, and the 106.50 of Qualcomm, conclusions become fuzzy.  It appears from a comparison of Intel’s P/FCF to its competitors, that it is priced somewhat fairly (and much better than that of Qualcomm).  However, as I stated in my previous post, regardless of competitor comparisons, a P/FCF in the 30s is two times more than the P/FCF I’d like to see.  But still, the P/FCF cannot tell me for sure if Intel is under or overpriced.

As previously stated, the best way to determine if a company's stock is priced well (and by well, I mean below its intrinsic/fair value) is to use a discounted cash flow analysis. In that vein, I wanted to prepare a very basic discounted cash flow analysis to see if my original conclusion was justified.

Let me start by saying the discounted cash flow analysis is built primarily of assumptions and is therefore only as good as the accuracy of those assumptions.  Therefore, I prepared the analysis under two different scenarios, using both conservative and aggressive assumptions for revenue growth.  All other assumptions were held constant.  Keep in mind that the other assumptions can have a significant impact on the end value as well.  However, for simplicity and comparison sake, I have kept them constant.  The purpose of this analysis is just to provide a basic range of potential fair values based on revenue growth (again, I'm no expert and simply want to know if my previous conclusion based on P/E and P/FCF ratios was at least directionally correct).

Time to Discount Cash Flows

To begin with, we'll look at Intel's pricing based on 5-year conservative growth rates.  Subsequently, we’ll look at Intel’s pricing based on 5-year aggressive growth rates.

Conservative Growth

In millions, except for intrinsic value

Aggressive Growth

In millions, except for intrinsic value

As you look over the tables above, it’s imperative that you remember a slight change in any of the assumptions could have a significant impact on the intrinsic value.  As such, you should adjust the analyses based on your own estimates and assumptions (as mine are just that – assumptions).  Don’t believe Intel will achieve the growth rates used above?  Fine, adjust accordingly.  Think Intel will achieve better operating margins?  Again, adjust accordingly.  You can take from the basic framework I’ve used above and adjust it for your own assumptions and therefore calculate your own estimate of Intel’s true, fair value.  The whole point is to make a more informed investing decision, not one built purely of speculation.

Time to Discount Intel

As you can see from the analyses, Intel’s pricing under conservative and aggressive growth scenarios, and based on the underlying assumptions above, is anywhere from $24.07 to $31.09.  So, what does all this mean?  Considering Intel’s pricing today at roughly $26.17 per share, I would say Intel is priced very close to its intrinsic value.  Therefore, consistent with my previous conclusion based on the P/FCF analysis, I would not recommend investing in Intel. 

This is not to say that Intel isn’t a great company and won’t ultimately achieve high returns for investors.  It’s simply to say that based on my own analysis, I don’t believe Intel is underpriced enough to warrant a safe investment for value investors.  If Intel drops below $24.07 anytime soon, then I might be more tempted to buy, as the price would then be below my conservative threshold.  Until then, I’ll keep a watchful eye on the price and continue looking for other companies that might be undervalued.

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