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.
  • How much 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 P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow, which 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 10.8 and an EV/FCF ratio of 12.9 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 17.0 and a five-year EV/FCF ratio of 15.8.

A positive one-year ratio of less than 10 for both metrics is ideal (at least in my opinion). 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 10.8 12.9 17.0 15.8
Advanced Micro Devices (NYSE: AMD  ) 11.5 24.2 NM NM
NVIDIA 15.4 7.6 29.2 10.9
Texas Instruments 17.0 16.5 16.5 15.4

Source: S&P Capital IQ; NM = not meaningful because of losses.

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 12.4% to 26.3%. In that same time frame, unlevered free cash flow margin has ranged from 15.3% to 26.3%.

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

Source: S&P Capital IQ; margin ranges are combined.

Source: S&P Capital IQ; margin ranges are combined.

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 22.7%. Meanwhile, Wall Street's analysts expect future growth rates of 12.1%.

Here's how Intel compares with its peers for trailing-five-year growth (because of losses, AMD's trailing growth rate isn't meaningful):

Source: S&P Capital IQ; EPS growth shown.

Source: S&P Capital IQ; EPS growth shown.

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

Source: S&P Capital IQ; estimates for EPS growth.

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples that shares of Intel are trading at, the volatility of its operational performance, 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 a 10.8 P/E ratio, and we see some strong numbers for Intel. Its strong margin range is matched only by Texas Instruments, and its past growth and future growth prospects are at the top of its peer group -- all this for very reasonable price multiples. Its one-year multiples are lower than chief competitor AMD's, and over five years, forget about it -- AMD isn't even profitable.

There are concerns over Intel's ability to catch up in the mobile space (think processors for smartphones and tablets), but it has a dominating position in PC processors and the resources to not be counted out. I'm not a tech expert, but the combination of the numbers and prospects make Intel worth looking into if you're interested in tech. As another data point, our CAPS community rates Intel five stars (out of five). But all this is just a start. If you find Intel's numbers or story compelling, don't stop here. Continue your due-diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

I wrote about a stock that's flying under the radar in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.

Anand Chokkavelu owns shares of NVIDIA, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of NVIDIA and Intel and writing puts on NVIDIA. 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.


Read/Post Comments (5) | Recommend This Article (5)

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 March 24, 2012, at 5:37 PM, mwlove wrote:

    One might also add that Intel has the best dividend of the bunch.

  • Report this Comment On March 24, 2012, at 6:25 PM, SnarfJabroni wrote:

    Intel has morphed from a growth company, to a value company, to a growth AND value company.

    Revenue and profits are growing at double-digits over the past few years, INTC stock is up 35% over the past 12 months while the Dow, Naz and S&P are all up in the 10% range, and INTC's dividend yield of 3% is better than a 10-year US Treasury Bond.

  • Report this Comment On March 24, 2012, at 7:25 PM, russfischer1013 wrote:

    Intel Investment Thesis

    Manufacturing Capacity

    In the 2010 fourth quarter earnings conference call, Intel management discussed a process shrink from 32nm to 22nm. They also mentioned that they have three primary fabrication centers. With a shrink to 22nm those three facilities could be reduced to two and have the same chip output. Surprisingly, the CEO announced that Intel would be going to a four fab model. This move effectively doubles the number of chips the company could produce relative to 32nm.

    What is the added capacity to be used for?

    From Paul Otellini:

    “As we approach our 22-nanometer transition, we are increasing our investments in manufacturing to capture what we believe is a significant opportunity for growth. Stacy will walk you through more details in just in a moment, but in short the market opportunities for our 22-nanometer products are outstanding. As a result, we are growing from the model of three high volume leading-edge manufacturing fabs to four

    Our 22-nanometer process will be the foundation for growing PC and server segments, as well as a broad family of Atom-based SoCs, serving smartphones, tablets, smart TVs, and other embedded devices.”

    Technology

    With the move to 22nm, Intel has grown the lead over the best in class competition to as much as two generations of manufacturing technology. This 22nm technology will also feature TriGate transistors that will increase the performance of the transistors while reducing power consumed dramatically. Some recent information indicates a reduction of 95% in quiescent power consumption when compared to 32nm planar transistors.

    Ultrabook

    Intel is promoting a notebook format called the “Ultrabook”. This product is a thin packaging format similar to the MacBookAir. Intel is subsidizing tooling and supply chain establishment for PC manufacturers to the extent of $300 million. The Ultrabook, in most cases, will be too thin to use a hard disc drive, so flash based solid state drives should have huge growth as this plays out over the next 2-3 years. The boot time for an Ultrabook with a SSD will be seconds, the performance will be much higher relative to a HDD PC and it will be “always connected” even when in sleep mode. The elimination of a HDD and the low power level of the new 22nm TriGate Intel processors will extend battery life substantially.

    Intel makes Solid State Drives. The Intel/Micron partnership has produced the world’s first 128Gb flash chip in the Micron/Intel joint venture fab in Singapore:

    http://seekingalpha.com/news-article/2097633-photo-release-i... The article seems to imply an eight chip stack of these chips to produce a 128GB SSD in a thumbnail size format.

    Mobile

    Many analysts give Intel a bad rap due to their lack of involvement in smart phones and tablet computers. Some even feel that embedded ARM processors represent a serious threat to Intel long term.

    The real fact is that Intel has an architecture that is very high on computational power and also higher on electrical power than these mobile devices could tolerate. Looking at this from the recent past, Intel would not call the mobile business a served market. The devices neither needed the compute power offered by Intel nor could they tolerate the higher power level.

    That all changes at the 22nm TriGate node. The mobile devices need for more compute power than ARM processors can provide is growing and the latest Intel technology will meet or beat the electrical power requirements of these mobile devices.

    The bottom line is that Intel could not participate in this segment until now. They could, however, prepare for engagement in the mobile business. They have done this by building manufacturing capacity and designing low power functional blocks while waiting for their 22nm manufacturing plants.

    We can expect some interesting announcements at the upcoming Consumer Electronics Show in January.

    Infineon

    Bought Infineon’s baseband business in order to have a complete, hassle free, market proven baseband solution that can be embedded in an application processor SoC.

    FPGA

    In an unprecedented move, Intel is doing foundry work for a startup FPGA company. Intel is giving Achronix Semiconductor access to its 22nm TriGate process.

    The speculation is that the payoff for Intel is complete access to the Achronix technology for embedding with Atom processors in order to give mobile products OEM customers a level of product design flexibility not available from any other application processor vendor.

    http://online.wsj.com/article/SB1000142405274870447790457558...

    http://www.eetimes.com/electronics-news/4210263/Intel-to-fab...

    Security

    A while back Intel bought McAfee, probably not just because they like to write big checks. McAfee announced DeepSAFE at the Intel developers forum. DeepSAFE provides security near the silicon level, beneath the operating system. It is very possible that Ultrabooks shipped with the new Intel Ivy Bridge CPUs will have a final solution to the exasperating problems of malware by putting “hooks” in the chip that makes all other security software obsolete. This could be rocket fuel that launches the Ultrabook next year.

    Apple

    Apple and Samsung are locked into 30 different lawsuits in nine countries. To me it is obvious that Apple can no longer depend on Samsung as a supplier of critical component such as their “A” series of application processors.

    The scale of this business will soon approach 300 million devices between the iPod, iPad, and iPhone. The current A5 chip is 122 sq mm in size. That means that 500 chips can be produced on a 12” wafer. 300 million chips will require a leading edge manufacturing capacity of 600,000 wafers per year. That level of capacity/technology only exists at two companies in the world, Samsung and Intel. The Intel technology is two generations advanced from the Samsung process, so moving to Intel would produce a smaller A5 chip at higher speed and even lower power.

    The Citi semiconductor analyst feels this is a distinct possibility and could be made public around the end of the year. http://www.cnbc.com/id/43327072?__source=yahoo|headline|quot...

    In the latest earnings conference call, Otellini was asked if Intel is doing foundry work for anyone. His answer was that they are doing a small amount in the FPGA area (Achronix), and “a couple of strategic customers that I am unable to discuss at this time”. Would Apple be considered strategic?

    While I’m at it, why would Intel do foundry work for a startup FPGA company? My guess is that Intel intends to include a chunk of FPGA in their first mobile SoC product. That would give unparalleled design flexibility to end customers who select that part.

    Side note: Apple and Intel have collaborated on the development of the Thunderbolt technology used in the Apple computers. This is an exclusive arrangement for some period of time, after which it will be opened to other equipment manufacturers. Intel makes the part.

    The Intel investment thesis

    • Ultrabooks will stimulate a new growth cycle in PCs.

    • Solid State Drives represent a $70 billion flash memory opportunity with Intel positioned well.

    • Intel has a huge fabrication technology lead over the next best competitor.

    • Intel is actively building out capacity to serve these new opportunities.

    • Intel’s mobile engagement will begin in 2012.

    • A final security solution.

    • An Apple/Intel relationship is very likely to come out of nowhere to surprise the doubters.

    • An Atom based SoC with embedded baseband and FPGA?

    • Intel’s additional manufacturing capacity could support a relatively short term doubling of the company.

  • Report this Comment On March 25, 2012, at 10:31 AM, TMFBomb wrote:

    Interesting comments so far, all. And, yep, it's got the best dividends (currently around a 3% yield).

    Fool on,

    Anand

  • Report this Comment On March 27, 2012, at 2:35 PM, kmcsparren wrote:

    I originally invested $5K in 1996 and rode it all the way up and down again because I am a long term investor. Today INTC is a very small portion of my portfolio after selling 50% of my shares last year. Until it can show me that it has more staying power rather that the narrow band it trades in today I will not invest another dime.

    Thanks for all of the information and I will step it up a notch on my watch list and if it shows any definitive pricing support above $33 - $35, I may get back in.

    Again Thanks

    Kevin

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