Intel Corporation: Investment Thesis
Intel Corporation (INTC) is currently trading at an adjusted non-GAAP P/E ratio of 11.25. To gain perspective, Microsoft (MSFT), Advanced Micro Devices (AMD), and Qualcomm (QCOM) are currently trading at adjusted non-GAAP P/E ratios of 29.41, 85.0, and 20.90, respectively. But, I only see limited likelihood for multiple expansion for Intel’s P/E ratio, based on historical ratios and low growth estimates from analysts.
Is Intel A Buy ?
It’s unusual to see a quality dividend-paying stock trading around the 11.0 P/E mark today. Whether Intel is a buy at present depends largely on whether limited EPS growth per analysts consensus estimates can be exceeded.
Best Option – Wait For a Lower Share Price
Based on current share price of $52.09, and on analysts’ consensus estimates, and assuming a P/E ratio around its 5-year historical median of 12.64, Intel is indicated to provide returns of less than 7% if held through end of FY 2021 or FY 2022. But current P/E ratio is ~11.0 and it is hard to see what would cause multiple expansion to the 12.64 level. Without multiple expansion there is the risk of negative returns if buying Intel at the current share price. Share price movements over the past three months suggest holding off buying could provide an opportunity to buy well below the current share price. Doing so would significantly lift potential returns and provide a margin of safety.
Source: Intel website
Empowering Investors To Make Informed Decisions
There are many arguments on whether company performance should be judged on free cash flow, earnings per share, or other performance measures. Knowledgeable investors may support one over the other, but always with the qualification, these measures should not be used in isolation when making investment decisions. In this article, I hope to show how targeting a desired return on an investment in shares can be facilitated by actually estimating what future returns will be, based primarily on analysts’ EPS estimates and other publicly-available data.
First, I provide details of actual rates of return for Intel shareholders investing in the company over the last four to five years.
Intel: Historical Shareholder Returns
Table 1 – Intel: Historical Shareholder Returns
For many stocks where I create a table similar to Table 1 above, I find a wide range of returns indicating a degree of volatility and risk. Table 1 above shows the results for Intel were strongly positive for eight of nine different investors, each investing $3,000 over the last five years, and holding to the present. The average yearly rates of return range from 5.7% for investor G to 18.1% for investor F. These rates of return are not just hypothetical results, they are very real results for anyone who purchased shares on the various dates and held through to Oct. 11, 2019. In considering which investor in Table 1 has achieved the best investment returns we must take into account not only the percentage rate of return but also the “duration” of the investment. Investor F has the highest rate of return at 18.1%, and her investment has grown in absolute terms by $1,320 from $3,000 to $4,320. Investor B’s investment has grown in absolute terms by $2,639, 2 times Investor F’s investment, despite a lower 15.9% rate of return. This higher absolute growth despite the lower rate of return is due to the longer “duration” the shares have been held by Investor B. Duration is important. Long duration coupled with high rates of return are very powerful allies for investors. The other eight hypothetical investors could have been invested in other stocks during the period they were not invested in Intel, but those other stocks might not have provided anywhere near a 15.9% rate of return. If all nine investors in Table 1 above continue to hold, the percentage rate of return will increase or decrease the longer the shares are held due to the effect of duration and the rate of growth of the share price going forward. This will be true for all nine investors in Table 1 above and particularly so for Investor F. If the rate of share price growth going forward is lower than past share price growth for each investor, duration will lower the rate of return, and vice versa.
Intel: Projecting Future Shareholder Returns
If rate of return is the basis on which we judge the historical performance of our investments, then surely we should be seeking to estimate future likely rates of return when we are making investments. But how do we do that? I use proprietary models to generate net income, balance sheet/cash flow and projected rates of return going out three to five years. Much of this is automated, but still involves a great deal of research and business and data analysis to back up the projections. I will undertake this detail where subscribers have identified promising companies that are under-covered by analysts. I also will undertake this detail where I believe the analysts covering a stock have missed some important aspect and I believe the market will be surprised come earnings release time. Recent cases where market surprises have been identified can be found in these articles, “RH: Expect A Strong Q1 Beat – Trigger For A Massive Short Squeeze” and “Sleep Number: Expect A Strong Second Quarter EPS Beat And Increased Full-Year Guidance.” Now, all of that takes a lot of effort, with the end result often not clear until after the work is done. Before I get into that level of detail, I am able to use my high level models to project indicative future rates of return for individual stocks, as explained below. Let us first look at the traditional approach to assessing value of a stock for investment purposes.
Intel: Qualitative Assessment Of Value Grade For Share Investment Decisions
Figure 1 below is based on data from Seeking Alpha PREMIUM.
Data Source: Seeking Alpha PREMIUM Valuation Metrics
As can be seen, Figure 1 is a qualitative assessment providing an overall value grade of “B” for a share investment in Intel at current share price. Seeking Alpha PREMIUM also provides analysts’ estimates of EPS for Intel as per Figure 2 below.
Figure 2 – Summary Of Analysts’ Adjusted Non-GAAP EPS Estimates
I incorporate analysts’ EPS estimates from both SA PREMIUM and from Zacks Research into the averages I adopt for EPS estimates. There always are issues with using analysts’ quarterly and yearly EPS estimates together. Not all analysts provide quarterly estimates, so the number of analysts will be different for quarters and year. This is part of the reason the quarterly estimates seldom add up to the yearly estimates. Another reason is the analyst providing the “high” estimate for a given year might not also be the analyst with the highest estimate for each and every quarter of that year. Accordingly, I give priority to the yearly EPS averages and prorate the quarterly EPS estimates to ensure they add to the yearly total. This massaging might seem pedantic, but the differences between quarters and years can be large and the process is automated.
As for the value grading per Figure 1, EPS and EPS growth estimates are qualitative in nature and do not quantify the rate of return that can be expected for the stock in question. The next thing we require to turn qualitative data into a quantification of projected rates of return is an estimate of future P/E ratios as per Figure 3 below.
Figure 3 – Non-GAAP P/E Ratios, Historical And Future Estimates
Figure 3 is primarily designed to determine an appropriate range of non-GAAP P/E ratios for determining estimated future share price levels for Intel. This is necessary for quantifying estimated future rates of return. Figure 3 also informs us of past non-GAAP EPS growth rates compared to forward estimates of EPS growth based on analysts’ consensus estimates. The forward EPS estimates show modest EPS growth over the next two years compared to negative EPS growth projected for FY 2019. It should be understood, in the short form estimated rate of return quantifications below, I am relying purely on the soundness of analysts’ consensus estimates of EPS.
Intel: Quantitative Assessment Of Value For Investment
Before developing our own detailed estimates of future earnings, cash flows, etc., for a given company, we can quantify the range of potential rates of return utilizing analysts’ estimates of EPS available from Seeking Alpha PREMIUM, Zacks Research through Nasdaq, and other qualitative data per figures 1, 2, and 3 above. Table 2 below shows our 1View∞Scenarios Dashboard developed for this purpose, and in this case we use the dashboard to quantify potential rates of return from an investment in Intel at current share price.
Table 2 – 1View∞Scenarios Dashboard Intel Projected Rates Of Return
Note: FY 2022 and FY 2023 are blanked out due analysts estimates only to FY 2021.
Table 2 shows buying at the current share price would result in rates of return of less than 7% for exits at end of years FY 2020 and FY 2021, assuming a P/E ratio of 12.64 (based on the median calculated in Figure 3 above).
The Dashboard will hopefully seem less daunting, if I walk you through it from top to bottom.
- Analysts Estimates non-GAAP EPS TTM – The EPS amounts come straight from Figure 2 above.
- P/E Ratio Non-GAAP EPS TTM basis – Through end of FY 2019 the P/E ratios are calculated by dividing actual/projected share price by actual/projected EPS. For FY2020 to FY2022 the P/E ratio is input through the assumptions section further down in Table 2.
- Share price at buy date/end date – the buy date share price is the share price at which you are targeting to buy the shares. It’s either the current share price or the lower entry share price you are targeting per the assumptions further down in Table 2. The end share price is the calculated share price at the end of the period you are planning to hold your investment.
- Dividend increases included in the base projections are my estimates of dividend per share increases of ~4% to 5% per year.
- Rate of Return (IRR) – This is the projected rate of return you will achieve based on the assumptions that have been input. The rates of return calculated here are calculated on the same basis as the actual rates of return per Table 1 above.
- Current share price – This is a direct input that can be changed from day to day as the share price changes.
- Change start share price – This allows changes to the starting buy share price if the current share price does not indicate a satisfactory rate of return for your requirements. Particularly with a ticker showing a degree of volatility there can be opportunities to buy at a lower share price than the current share price. This function allows to determine in advance at what share price you would find the indicative rate of return attractive (see also worked example further below).
- Current QTR dividend eligibility – By putting in both the targeted buy date and the ex-dividend date (for dividend-paying stocks) the current quarter’s dividend will be included or excluded from return calculations.
- Share price inc (dec) over current price/previous quarter – This allows to project a higher or lower share price at or during end of Q3-19 and Q4-19, by adjusting share prices by a percentage up or down.
- P/E ratio (adjusted non-GAAP EPS basis) – Rather than modeling share price changes by a percentage increase or decrease, share prices for FY 2020 to 2022 are projected on the basis of multiplying assumed P/E Ratio by Analysts’ EPS estimates for each year. The Base P/E Ratio assumption for FY 2020 to FY2022 is adopted from the historical median figure of 12.64 per Figure 3 above.
- Other outcomes for shareholders show the proceeds projected to be received from the investment, and projected share price growth rates and dividend yields flowing from the input assumptions.
Intel: Targeting A Satisfactory (To You) Return On Investment
The problem with waiting until shares are cheap to buy is they may have become cheap because the outlook for the stock and its earnings has worsened. But there can be a considerable volatility in the price of shares with no discernible change in outlook. The shares have traded below $45 several times in the past 3 months, and it is possible they will trade down at that level again in the next 3 months. That is particularly so with analysts’ consensus estimates per Figure 3 indicating Q3 and Q4 2019 non-GAAP EPS will fall well short of comparable EPS figures for Q3 and Q4 2018.
Using the 1View∞Scenarios Dashboard I’m able to see the effect on projected rates of return of buying Intel shares at say $46.88 (10% below current price), in Q4 2019.
Timing Stocks Versus Timing The Market
Table 3 – 1View∞Scenarios Dashboard Intel Projected Rates Of Return
In Table 2, buying at the current share price of $50.78 would give indicative average yearly rates of return of less than 7% for an exit at end of FY2020 or FY2021. By comparison, buying at $46.88 per Table 3, with other assumptions unchanged, would increase returns to over 16% for an exit at end of FY2020 and to ~12% per year for an exit at end of FY2021. Targeting to buy stocks at a favorable entry price is quite different to and should not be confused with timing the market. Timing the market requires you to increase or decrease the total value of your portfolio of stocks depending on the direction you perceive the market is heading. Regardless where the market is heading, individual share prices fluctuate independent of market movement.
Whether building or re-weighting a portfolio, targeting favorable prices for share additions does not require periods of not buying at all. With 1View∞Scenarios Dashboards set up for each of the stocks in your portfolio, it’s possible to select for additional purchases those stocks in your portfolio that presently have the most favorable indicative future return at current or targeted share prices.
Intel: Rate Of Return Projections – Consensus, High, And Low
Table 4 – 1View∞Scenarios Dashboard Intel Projected Rates Of Return
Comments on Table 4:
- A range of estimates included– In Table 4 above, I have shown the expanded form of the 1View∞Scenarios Dashboard, including analysts’ consensus, high and low adjusted non-GAAP EPS estimates.
- Consensus High and Low EPS cases – The scenario is for buying at the current price of $52.09 but with the P/E ratio decreasing to 12.0 for FY 2020 and FY 2021. I believe it is reasonable for Intel P/E ratios to be below the historical median as the earnings growth rates reflected in the analysts estimates are far below historical growth rates. For the analysts’ consensus case, the adjusted non-GAAP P/E ratio of 12.0 results in returns ~2.3% for FY 2020 and ~4.0% for an investment held through end of FY 2021. If the low case eventuated that would result in negative returns.
- DRIP and non DRIP – Note that there is normally very little difference in the rates of return for the dividend reinvested/not reinvested cases. This is because rate of return calculations for a series of future cash inflows (such as the dividends received in cash) assume that cash received is reinvested at a similar rate of return. So in fact both cases are based on an assumption of reinvestment of dividends, but not necessarily in the same shares for the non DRIP case.
Intel: Stress Testing With The 1View∞Scenarios Dashboard
Table 5 – Assume Long-term Adjusted Non-GAAP P/E Ratio of 10.22
For purposes of simplification in explanation I’m showing here only the results based on analysts’ consensus estimates. Table 5 shows if P/E multiples for Intel decreased to the historical low of 10.22 through end of FY 2021, the result would be negative returns. This assumes current analysts’ consensus estimates continue to be met, and dividends per share continue to grow ~4% to 5% per year.
Intel: Limitations Of This Short-Form Analysis
The short-form analysis carried out above relies heavily on analysts’ estimates of future adjusted non-GAAP EPS for Intel going out a little over 2 years. The consensus estimates are based on number of analysts’ estimates for FY 2019 33, FY 2020 34, and FY 2021 10. These are no doubt all experienced and competent analysts, so there is reason to expect the estimates should be reasonably reliable based on current knowledge.
As mentioned in the investment thesis at the beginning, Intel has the potential to provide single-digit returns, but only with significant multiple expansion from the present. If there were to be a market downturn, holding Intel shares would likely result in negative returns. Waiting for a possible lower share price would enhance future returns and could make Intel a buy. Utilizing the 1View∞Scenarios Dashboard enables quantification of the difference in potential returns at different entry share prices and under various other assumptions.
If you wish to be notified of future articles, please click “Follow” next to my name at the top of this article.
- Or become an Analysts’ Corner member. Share investing ideas with a like-minded group. Access 1View∞Scenarios™ dashboards to allow scenario testing for tickers of interest. You are welcome to register today with Analysts’ Corner to take advantage of market sentiment and company fundamentals, to objectively target rates of return, rather than make purely qualitative assessments based on imperfect and inappropriate data.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.