Investors just don't like Intel (Nasdaq: INTC).

The proof is all over the place, but really we don't have to look any further than the stock's current valuation. With a trailing price-to-earnings ratio of just 10, it's pretty obvious that this one-time tech darling is no longer loved by investors.

Why the lack of love? In a word: mobility. Intel hasn't kept up with ARM Holdings (Nasdaq: ARMH) when it comes to chips for tablets or smartphones, and while it may be able to claw its way back if gadgets based on Microsoft's Windows platform gain traction, Microsoft hasn't done a great job keeping up with Apple (Nasdaq: AAPL) and its stable of wireless products.

However, I think investors may have an overly bleak view of the future of more traditional computers and Intel's ability to compete in mobility, and so the pessimism that's kept Intel's stock down may be a significant opportunity.

Earnings expectations
As I outlined in a previous article, a good way to get a baseline for growth expectations is to check on what Wall Street analysts expect and how fast the company has actually grown in the past.


Annual Growth Rate

Analysts' estimates 10.7%
10-year historical 4.0%
5-year historical 5.0%
3-year historical 21.3%
Last 12 months 80.4%

Source: Capital IQ, a Standard & Poor's company. Historical growth based on operating earnings.

Now comes the tougher part: How fast do we actually believe Intel can grow? Right away, I'm going to suggest that analysts' estimates are far too optimistic. Intel's business is cyclical, and right now it's much closer to the peak than the trough. And that's not to mention the feared impact that mobile products will have on traditional PC chips. More broadly though, demand for high-quality processors is only going to increase as global growth picks back up and technology plays an ever-larger part in our day-to-day lives.

The top end of my expectation is that Intel will grow its earnings at 7% per year over the next five years -- and I consider that a pretty optimistic view. At the midpoint, I see growth closer to the 10-year average of 4% per year. And on the bottom end, I've penciled in a 4% decline per year.

Pinning down valuation
Valuations are a moving target that can be tough to predict, but, as with growth above, using a range of values can give us a view of our potential returns without requiring a Miss Cleo-type prescience.

In creating our range, a good place to start is where the stock is trading right now and what its historical trading range has been. As I pointed out above, Intel is currently trading at a very low multiple. In fact, its average annual multiple of 10.5 over the past 12 months is the lowest it's been over the past decade. Excluding this past year, Intel's annual-average P/E has been as high as 80 and as low as 17.

For broader context we can also look at how similar companies trade.



Trailing P/E

Estimated Growth

Cisco (Nasdaq: CSCO) Communications equipment 13.2 11.3%
Texas Instruments Semiconductors 13.3 10.0%
Broadcom (Nasdaq: BRCM) Semiconductors 19.7 18.7%
NVIDIA (Nasdaq: NVDA) Semiconductors 40.3 16.6%
National Semiconductor Semiconductors 19 8.0%
AMD (NYSE: AMD) Semiconductors 13.3 6.0%

Source: Capital IQ, a Standard & Poor's company.

Obviously, these companies aren't all exactly the same as Intel. AMD's business may be the closest, but even there its status as runner-up to Intel makes it -- at least if you ask me -- a less attractive business to own. And even though many of the others are similarly listed as semiconductor manufacturers, the product sets differ -- from graphics processors at NVIDIA, to analog and mixed signal chips at National Semiconductor. However, the group still gives us some insight into how we might value Intel.

Even after we throw out NVIDIA as an outlier, it still appears that Intel is sorely undervalued when it comes to its industry and comparable companies. If we look at it from the broader context of the S&P 500 index, it's even more apparent; on a trailing basis, the overall S&P trades at 16.8 times trailing earnings.

For my downside case, I assumed that investor faith in Intel doesn't recover and the stock continues to trade at 10 times earnings. In the more likely midcase scenario, I have the stock's trading multiple climbing to 13, while on the upside I could see it trading at 17 times earnings.

Dividends and share count
Our final stop is to consider how much we'll get paid through dividends and whether changes in share count will impact our bottom line.

My main concern with share count is that I'll end up with a company that has a history of significant dilution. That's far from ideal because big share issuances cut the portion of the profits that each share receives. Although Intel's share count crept up slightly last year, we don't have much to worry about here. Over the past decade, the share count, on average, has fallen by roughly 2% per year.

As for dividends, Intel currently pays a very attractive 3.6% dividend and has grown that payout nearly 15% per year over the past five years. Though I assumed above that earnings growth will be somewhat sluggish, thanks to ample cash flow, a low payout ratio, and a hefty cash balance on the balance sheet, I'm projecting that the company will grow dividends at a brisker pace. For my upside, midcase, and downside scenarios, respectively, I projected dividend growth of 12%, 8%, and 4%.

The verdict please!
The end result of all of this is the returns we can expect under the various scenarios. Here's what my three scenarios would look like.


Annual Earnings-per-Share Growth

Earnings Multiple

Annual Dividend Growth

Expected Annual Returns

Upside 7% 17 12% 22.6%
Midcase 4% 13 8% 13.4%
Downside (4%) 10 4% 0.4%

Source: Author's calculations.

Let's now go back to that question that we started with: Can you double your money with Intel's stock? If the upside scenario holds, the answer is a definite "yes." Even in the more likely midcase scenario, the overall return of 88% is nothing to thumb your nose at. The risk, of course, is the downside scenario, where your money would basically do nothing over the next five years. I happen to think that's a pretty attractive risk/reward trade-off and I've put my money where my mouth is as I own Intel in my personal portfolio.

Of course, the future is an ever-changing picture, so you need to keep on top of what's going on at Intel to see which set of numbers the company and stock are able to live up to. And you can do just that by adding Intel to your Foolish watchlist.