How Much Is Intel Worth?

At the end of last year, I picked Intel (Nasdaq: INTC  ) as my best stock for 2010. Good thing I wasn't holding my breath for a breakout, because the stock has actually underperformed the market so far this year.

Not that I expected the chip champ to have some crazy bull run during the year and make investors rich: After all, it's a huge company with more than $40 billion in revenue. But in terms of high-quality companies that can be bought at attractive prices, I think Intel has to be very high up on the list.

But just how attractive is Intel's price? Well, let's take a look to see if this tech giant really is a bargain.

It's a beautiful day in the neighborhood
One way to get an idea of what a stock might be worth is to check out how other comparable semiconductor and high-technology companies are valued. So let's take a look at how Intel stacks up.

Company

Price / Forward Earnings

Total Enterprise Value / Trailing Revenue

Price / Book Value

Forward PEG

Intel 11 2.3 2.4 1
Broadcom (Nasdaq: BRCM  ) 14.9 2.7 4.2 0.8
Cisco Systems (Nasdaq: CSCO  ) 13.4 2.6 2.9 1.1
Maxim Integrated Products (Nasdaq: MXIM  ) 13.5 2.8 2.8 1.1
National Semiconductor (NYSE: NSM  ) 10.5 2.3 6.5 1.4
NVIDIA (Nasdaq: NVDA  ) 20 1.4 2.5 1.4
Texas Instruments (NYSE: TXN  ) 11.9 2.4 3.5 1.1
Average 14 2.4 3.7 1.1

Source: Capital IQ, a Standard & Poor's company, and Yahoo! Finance.
Average excludes Intel.

Using each of those averages to back into a stock price for Intel, and then taking the average across those results, we can come up with an estimated price per share a few pennies shy of $25.50. This would suggest today's price of right around $20.50 is notably undervalued.

A comparable company analysis like this can sometimes raise as many questions as it answers, though. For instance, is the entire group properly valued? A supposedly fairly valued -- or even overvalued -- stock among a bunch of other undervalued stocks may actually be an undervalued stock, and vice versa.

Also, while these companies are comparable, they're certainly not all the same. National Semiconductor and Maxim, for instance, are also chip companies, but the analog and mixed-signal chips that they produce aren't the same as the digital chips that Intel focuses on. While Cisco is a fellow tech titan, its communications equipment business is very different than Intel's. And unfortunately, Advanced Micro Devices (NYSE: AMD  ) , the company with the most comparable business to Intel, has had such wonky financials recently that drawing valuation comparisons would be relatively meaningless.

So with all that in mind, it's best to combine comparable company analysis with another valuation technique.

Collecting the cash flow
An alternative way to value a stock is to do what's known as discounted cash flow (DCF). Basically, this method projects free cash flow over the next 10 years and discounts the tally from each of those years back to what it would be worth today (because a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (aka guesses) and it tries to predict the future, it can be a fickle beast, so its results are best used as guideposts rather than written-in-stone answers.

For Intel's DCF, I used the following assumptions:

2010 Unlevered Free Cash Flow $10 billion
FCF Growth 2010-2014 3%
FCF Growth 2014-2019 3%
Terminal Growth 3%
Market Equity as a Percentage of Total Capitalization* 98%
Cost of Equity 12%
Cost of Debt 3.3%
Weighted Average Cost of Capital 11.8%

Source: Capital IQ, a Standard & Poor's company; Yahoo! Finance; author's estimates.
*The percent of the company's public equity compared with its total value including debt.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is set based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers that I tend to thumb my nose at.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

As for Intel's growth, it may jump out that the 3% I've used is well short of the 12.3% that analysts seem to be projecting. In fact, I think that much of that expected growth rate comes from the huge jump in Intel's bottom line this year. Looking ahead, I think investors should probably count on pretty sluggish organic growth out of Intel.

Based on the assumptions above, a simple DCF model spits out a per-share value of just north of $25 for Intel's stock. This seems to confirm that the stock is undervalued.

Do we have a winner?
The valuations that we've done here are pretty simple and, particularly when it comes to the DCF, investors would be well advised to play with the numbers further before making a final decision on Intel's stock.

That said, pegging the price right between the two valuation models at $25.25, I feel comfortable saying that Intel's shares are a very worthwhile pickup right now. And because valuation alone is rarely reason enough to buy a stock, I'll throw in there that this is one of the world's premier tech companies and it also pays a not-too-shabby 3.1% dividend.

I've got my money where my mouth is on this one: Intel is one of the largest holdings in my personal portfolio. But I want to know what you think. Are Intel's shares really undervalued? Or am I out of my cotton-pickin' mind? Head down to the comments section and sound off.

Want to keep up to date on Intel? Add it to your watchlist by clicking here.

Intel is a Motley Fool Inside Value selection. NVIDIA is a Motley Fool Stock Advisor pick. The Fool has written calls (bull call spread) on Cisco Systems. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Intel and Texas Instruments. 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.

Fool contributor Matt Koppenheffer owns shares of Intel, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his Motley Fool CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.


Read/Post Comments (5) | Recommend This Article (9)

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 November 02, 2010, at 2:22 PM, TheDumbMoney wrote:

    On the one hand, I'm a big Intel fan. (It is a small percentage of my portfolio, though underweight compared to all but one or two other stocks, out of twenty or so.) On the other hand..., you've got five years of totally erratic EPS, you've got five years of declining or flat revenue at the most basic level, you've got a situation where net income constitutes well under half of the operating cash flow input in free case flow, you have five years of generally declining cash on hand, combined with five years of generally declining investments in property. I'm only looking through 12/2009, and I know things have looked up since then. But in short, there's a lot not to like about Intel, beyond the thematic storyline about it having missed the boat on mobile hardware, etc.: the more interesting story has been its fairly weak performance even prior to mobile revolution, in its 'core' business. IMO.

    To highlight this, compare to Microsoft. Intel and MSFT are often lumped together as the geriatric duo of falling-behind tech companies, but if you contrast Intel's with Microsoft's five-year performance in every single one of the metrics mentioned above (and compare to their similar PEG ratios and PE ratios), the distinction is stark, stark, stark...and not in Intel's favor! (Recognizing one is a software business, and one is generally a softward business, ultimate numbers still matter.)

  • Report this Comment On November 02, 2010, at 3:38 PM, lazytype wrote:

    "having missed the boat on mobile hardware"

    Like Atom or sth? Come on.

    It dropped during Greek panic, and then took a dip in "Death of PC" folly.

    The times of biggest pessimism is the right moment to buy. Management is buying.

    AMD has so much worse results grew more today. But so what? Are you looking for someone to be with you or trust the numbers?

    Tomorrow is ex-dividend date...

    :D

  • Report this Comment On November 02, 2010, at 7:51 PM, PostScience wrote:

    INTC's market cap is 22x that of AMD's. So I wouldn't bother comparing results. Obviously, the market doesn't expect much from AMD.

    Interesting thought. INTC could buy AMD with about 6 months of earnings. Wonder if that would be allowed to happen?

  • Report this Comment On November 02, 2010, at 11:10 PM, TheDumbMoney wrote:

    PostScience: I'm not sure the government would ever allow Intel to buy AMD, monopoly worries and all that.

    Varsovia: I barely understand what you're saying. I certainly don't dispute the existence of Atom, but I think it's indisputable that Intel is way behind in the smartphone and "pad" markets. Intel is a power in laptops, obviously, and even provides processors for Apple's resurgent iMacs, but that is not what I was talking about. As for AMD, I would not touch AMD with a ten foot pole attached to my...well...you know. I said I liked INTC. But I am aware of its deficiencies. As not posted above, I am also aware of some of the context of those deficiencies. Overall, I should add, I agree with the writer's assessment: I think a very-conservative FCF growth estimate of 3% for the next ten years (though I quibble with the assumption of 3% terminal) more than adequately takes into account my concerns, and I agree that INTC is a buy, though less so than it was at $18/share recently, or at $13/share, which was when I bought it.

  • Report this Comment On November 04, 2010, at 8:11 AM, lazytype wrote:

    @dumberthanafool

    Most of my comment was on the article.

    Funny how AMD is soaring on the basis of PE = 4 as reported on many finance sites (though it was a one time event) and now has a negative cash flow.

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