How Cheap Is Intel's Stock by the Numbers?

Numbers can lie -- yet they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • The amount of growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Intel (Nasdaq: INTC  ) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the price-to-earnings ratio. It divides the company's share price by its earnings per share (EPS). The lower the P/E, the better.

Then we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This tool divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). As with the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Intel has a P/E ratio of 11.6 and an EV/FCF ratio of 10.3 over the trailing 12 months. If we stretch and compare current valuations with the five-year averages for earnings and free cash flow, we see that Intel has a P/E ratio of 18.8 and a five-year EV/FCF ratio of 14.9.

A one-year ratio of less than 10 for both metrics is ideal. For a five-year metric, less than 20 is ideal.

Intel has a mixed performance in hitting the ideal targets, but let's see how it stacks up against some of its competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Intel

11.6

10.3

18.8

14.9

Advanced Micro Devices (NYSE: AMD  )

4.2

7.3

NM

NM

NVIDIA (Nasdaq: NVDA  )

40.9

3,238.9

32.7

17.4

Texas Instruments (NYSE: TXN  )

13.1

16.0

14.4

15.5

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how Intel's valuation rates on both an absolute and relative basis. Next, let's examine …

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash-flow generation.

In the past five years, Intel's net income margin has ranged from 7.1% to 24.7%. In that same time frame, unlevered free cash flow margin has ranged from 11.5% to 23.7%.

How do those figures compare with those of the company's peers? See for yourself:

 

In addition, over the past five years, Intel has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out …

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But even though you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared with similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Intel has put up past EPS growth rates of 6.9%. Meanwhile, Wall Street's analysts expect future growth rates of 11.0%.

Here's how Intel compares with its peers for trailing five-year growth:

 

And here's how it measures up with regard to the growth analysts expect over the next five years:

 

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Intel are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at an 11.6 P/E ratio.

Intel looks worth exploring further given its market dominance, consistent profitability, and reasonable price. If you also find Intel's numbers compelling, don't stop here. Continue your due-diligence process until you're confident that the initial numbers aren't lying to you.

Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis. And for another stock idea, check out my recent article: "The Dividend Opportunity Everyone’s Missing."

Anand Chokkavelu owns shares of NVIDIA. Intel is a recommendation of Motley Fool Inside Value and Motley Fool Stock Advisor. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Texas Instruments. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2010, at 12:00 AM, Glycomix wrote:

    Advanced Micro Devices(AMD) has high comparative levels of debt/equity of 3.90 and a current ratio of 1.93. While Intel has little debt (0.02); a current ratio of 3.34. AMD's PE goes from 5.03 this year to a forward PE of 22.00. Intel's PE is 11.04 this year, with a forward PE of 10.82.

  • Report this Comment On December 22, 2010, at 12:09 AM, Glycomix wrote:

    NIVIDIA (NVDA) is the only chip-company that currently doesn't have a high profit margin. Their profit margin is 5.84% verses profits in the low to high 20 percent for the other chip makers:

    - TXN 21.87%

    - ITEC 24.72%

    - AMD 27.19%

    More disturbing is the report that Apple isn't going to use NVDA graphic chips in its i-pad because the new intel chips have graphics built-in.

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