Intel

Intel Corporation is one of the world's largest semiconductor chip maker. The Company

develops advanced integrated digital technology products, primarily integrated circuits, for

industries such as computing and communications. It also develops platforms, which it defines as

integrated suites of digital computing technologies that are designed and configured to work

together to provide an optimized user computing solution compared to components that are used

separately. Intel designs and manufactures computing and communications components, such as

microprocessors, chipsets, motherboards, and wireless and wired connectivity products, as well

as platforms that incorporate these components. The Company sells its products primarily to

original equipment manufacturers, original design manufacturers, PC and network

communications products users, and other manufacturers of industrial and communications

equipment. Intel Corporation is based in Santa Clara, California.

Intel (INTC) saw its stock recently face a large sell off due to a strong quarter it disappointing

guidance. While the environment can always change, investors should be focused on the

fundamentals of the company beyond the next three months. As the company continues to create

world class products it will be the supplier of choice for any highly demanded or higher end

product in most cases. Additionally, Intel should benefit from continued advancements in

autonomous driving and the future of the automobile sector.

A. PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short.

This shows us how much investors are willing to pay for each dollar of earnings in a given stock,

and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is
to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it

compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Intel Corporation has a trailing twelve months PE ratio of 10.8, as you can see in

the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500

compares in at about 16.6. If we focus on the stock’s long-term PE trend, the current level puts

Intel Corporation’s current PE ratio slightly below its midpoint (which is 13.4) over the past five

years.

Further, the stock’s PE also compares favorably with the industry’s trailing twelve months PE

ratio, which stands at 13.1. At the very least, this indicates that the stock is relatively

undervalued right now, compared to its peers.

We should also point out that Intel Corporation has a forward PE ratio (price relative to this

year’s earnings) of just 10.3, so it is fair to say that a slightly more value-oriented path may be

ahead for Intel Corporation’s stock in the near term too.

B. P/CF Ratio

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric.

This ratio doesn’t take amortization and depreciation into account, so can give a more accurate

picture of the financial health in a business. This is a preferred metric to some valuation investors

because cash flows are (a) generally less prone to manipulation by the company’s management

and (b) are less affected by variation in accounting policies between different companies.

The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced

with reference to its cash flows generation potential compared with its competitors. However, it

is not commonly used for cross-industry comparison, as the average price to cash flow ratio

varies from industry to industry.

In this case, Intel Corporation’s P/CF ratio of 9.2 is lower than the industry average of 10.8,

which indicates that the stock is somewhat undervalued in this respect.

C. Broad Value Outlook

In aggregate, Intel Corporation currently has a Value Style Score of B, putting it into the top

40% of all stocks we cover from this look. This makes INTC a solid choice for value investors,

and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Intel Corporation is just 1.2, a level that is somewhat lower than

the industry average of 1.8. The PEG ratio is a modified PE ratio that takes into account the

stock’s earnings growth rate. Clearly, INTC is a solid choice on the value front from multiple

angles.

D. Performance

Intel reported recent quarterly results that beat on the bottom line but missed on the top.

Fourth-quarter revenue was $18.7 billion, up 9.4% versus the same quarter a year ago.

Additionally, the company saw earnings rise a healthy 18%. 2018 saw revenue set an all-time

record of $70.8 billion which was 13% higher than 2017.

A quick snap shot below shows investors just how strong Intel is performing.

The only thing that is of noticeable weakness was gross margin which suffered a 3.2% decline.

However, we will keep an eye on that as it appears for the year margins were only minimally

affected and it was not a trend.

The company significantly benefited from a lowered tax rate as well. This helped boost earnings

significantly and also allowed the company to return capital to shareholders. For the year the

company repurchased 217 million shares of stock which is about 5% of the total outstanding

shares. Considering continued strong cash flow is expected the company could keep reducing

shares and increasing the dividend as it did in the quarterly earnings announcement. While the
yield is not high, investors can count on a dividend that is safe as the payout ratio stands at less

than 30%.

Investors should also be happy to know the Mobileye division continues to grow as the adoption

of autonomous technology strengthens. Mobileye Q4 revenue was $183 million was up 43%

year over year. Continue to expect this momentum to drive forward, no pun intended.

Now, what disappointed investors can be seen below.

The company only expects minimal revenue growth, no margin growth, and very slight earnings

growth. While this is obviously disappointing, it is important to remember the company already

trades with quite low expectations. With a multiple of about 10x earnings, investors are not

pricing in any upside potential. I believe it was wise of Intel to set the bar relatively low as it will

give them an easy target to hurdle.

Investors should keep in mind that they had a record breaking 2018 and delivering two years of

growth for a legacy technology company of this size would be quite hard. I believe the company

could make another acquisition in the coming year that would further help it grow in the field of
autonomous driving or even in the IoT field. Time will tell, until than we can only decide if Intel

is worth purchasing on valuation.

E. Valuation

Looking at a historical valuation trend for Intel at least for the last 5 years, we can see Intel does

appear to be cheap.

The shares trade at a lower P/E, P/CF, P/FE, and PEG ratio than it has lately. The shares also

offer a higher earnings yield. While it is not leagues below the averages, it is below none the less

signaling an opportunity. This opportunity could be the result of hampered growth expectations,

however, investors with confidence that Intel is not slowing down and are interested beyond

2019 might find the risk/reward compelling at these levels. Even a return to 13x earnings at the

current earnings level would result in shares trading almost 30% higher. This is quite intriguing.

In the means time investors are paid to wait, the company raised its dividend a healthy 5% to

now return $1.26 a share yearly for each share owned. This is a pretty healthy yield compared to

its average as we can see below.

The shares are an average yield around 1.82% so getting anything higher could signal a buying

opportunity. Shareholders with a long term perspective should also be happy to know the

company will likely continue to raise its dividend and offer investors plenty of safe income as

the payout ratio remains low.

Lastly, compared to its closest peer, Intel trades at lower valuations.

With a healthy yield, lower P/S ratio, and lower forward P/E, it is clear which company is of

better value. Investors also get enormous balance sheet strength from Intel which should be

noted as a positive in any economic downturn.

F. Conclusion

For investors looking beyond 2019 earnings, Intel shares now offer an opportunity to be bought

at below average valuation levels. The company did an excellent job in 2018 and would be hard

pressed to repeat those results. However, going forward it is clear the company is set up to

continue to perform and return capital to shareholders. If there was an investment to be made in

the semi-conductor space Intel may be the premier choice for risk off investors. The shares

should offer healthy returns in the coming quarters between its dividend and low P/E multiple.

Every 1x turn in multiple would lead to a 10% raise in stock price. Even a return to 11x earnings

in the coming year would offer investors a 12-13% return. I will be looking to initiate a position

on the next down day where shares come under any significant pressure.
 REFERENCES

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2. Is Intel A Long Term Buy?(Feb. 3, 2019 11:43 PM ET) by AllStarTrader retrieved from

https://seekingalpha.com/article/4237747-intel-long-term-buy

3. Should Value Investors Pick Intel Corporation (INTC) Stock?

Zacks Equity Research (January 07, 2019) retrieved from

https://www.zacks.com/stock/news/346017/should-value-investors-pick-intel-corporation-intc-

stock

4. Intel - 25 Year Dividend History | INTC (May 24, 2019) retrieved from

https://www.macrotrends.net/stocks/charts/INTC/intel/dividend-yield-history

5. Intel Corp INTC May 27, 2019 | Index: Morningstar US Market TR USD retrieved from

https://www.morningstar.com/stocks/xnas/intc/quote.html