Like many “old tech” names, Intel (INTC) seems to be a bit of a battle ground stock. In other words, it’s a company that people love to hate. I’m not quite sure why, but I see the same sort of sentiment when it comes to other old school big tech names like IBM (IBM), Cisco (CSCO), Microsoft (MSFT), Oracle (ORCL), etc. Basically, if a company was around during the dot.com boom, the history associated with that sort of survival in the volatile tech space is going to have created a lot of friends and foes.
Money is made and lost with fierce velocity in this space. I’m not surprised that emotions run rampant when it comes to the old tech names. It’s hard to let go of a grudge. However, this piece isn’t about emotion, but instead a hyper focus on the rationality of fundamentals. I’ve owned Intel for years now, but after its recent sell-off, I thought it was time to revisit the name and see if its fundamental valuation pointed towards a buy.
The last piece I wrote on INTC was published on September 20th, 2017. I was bullish then, though not enough to add to my position. In hindsight, I was being greedy. I compared INTC’s recent performance to its peers and saw that it had massively underperformed. This was concerning, but then again, I like to buy weakness and INTC’s 12.7x P/E ratio at the time was attractive. It was yielding 2.95% with a healthy 49% TTM payout ratio. Sure, the company’s 5-year DGR of 5.86% wasn’t extremely attractive, but ~6% growth on a ~3% yield isn’t anything to sneeze at.
In the end, I passed, deciding to simply let the shares I already owned run, instead of adding more. Unfortunately for me, this turned out to be a mistake. In relatively short order, INTC shares ran up from the $37 they were trading at when I wrote that piece to the nearly $58 that they hit in mid-2018. During this run, the P/E ratio shot up from 12.7x to nearly 15x on a TTM basis. Well, after its recent sell-off, the TTM P/E is back down to that 12.7x range, and now I must ask myself, am I going to play it safe and potentially let history repeat itself?
Before I go on, I want to highlight the fact that my goal with this piece is to focus solely on Intel’s fundamentals. I know there’s been a lot of debate lately regarding the quality of INTC’s management, especially with CEO Brian Krzanich out and a lot of changes going on in the c-suite. Investors and analysts alike have been concerned with chip delays and potential market share being taken away from Intel by peers. In short, I’m not a Silicon Valley insider and I know it’s not my place to make calls on those sorts of things. But, what I can do well is take a look at Intel’s fundamentals, past, present, and future, using the various consensus estimates and make valuation-based decisions.
So, with that being said, let’s start at my favorite place when it comes to relative value analysis: F.A.S.T. Graphs. As you can see below, after cresting above their 10-year normal P/E for a bit back in June, shares have crossed back below that long-term average (I use the 10-year chart for INTC’s long-term average instead of the 20-year because the 20-year includes P/Es of ~50x back during the early 2000s and those really distorted the average and made the comparisons unrealistic).
Source: F.A.S.T. Graphs
I don’t think INTC is absurdly cheap by this relative metric. Shares were much cheaper than they are today back in 2012-2013 and during the summer of 2017. With that said, INTC has made 5 runs up to the ~15x range since 2014, and I wouldn’t be surprised to see sentiment change and push shares higher again.
15x has served as a pretty strong ceiling for INTC, and I think at this point, it makes sense for investors to consider using the ~12x and ~15x areas as boundaries for a potential trade since the company has been essentially stuck in this range since the start of 2014.
But, for longer-term oriented investors who don’t like the idea of trading in and out of the stock at the peaks/troughs, it’s also worth noting that INTC’s EPS continues to rise, which means that the stock’s price at both the low and high end of this multiple spectrum also rises over time. INTC has been in a bumpy uptrend since the bottom of the Great Recession, and although growth is expected to slow over the next year or two, I think the bull market in the semiconductor space will be powerful enough to continue to serve as a tailwind for this longer-term trend.
Speaking of the semiconductor industry as a whole, I think it’s important to note that Intel remains cheaper than many of its peers. There are the highflying names like NVIDIA (NVDA) and Advanced Micro Devices (AMD) that trade in the 40-50x range. Texas Instruments (TXN) trades for 22x. Analog Devices (ADI) trades for 17.7x. Taking a broader step back, the iShares PHLX SOX Semiconductor ETF (SOXX) trades for 24.5x (which is essentially double Intel’s valuation).
And as much as haters like to hate, while INTC has certainly underperformed its peers in the recent past, it has outperformed the broader market by a wide margin.
Are there other semis with better growth prospects than Intel? Sure there are. However, when you factor in Intel’s cash flows and dividend yield, I have a hard time believing that it deserves to trade at such a discount to the market and its peer group.
Broadcom (NASDAQ:AVGO) trades with a similarly low P/E ratio, but that company has been mired down with M&A news. Micron’s (MU) P/E is much lower than Intel’s even, but it focuses primarily on the DRAM/NAND memory chip area which many believe to be much more cyclical than Intel’s much more diversified portfolio of products. I understand that Intel has its problems too. C-suite uncertainty is never viewed in a positive light by the market. And maybe I’m biased because of it, but I’ve made good money buying Intel shares on CEO related weakness before (I originally bought INTC shares when Paul Otellini stepped down and Krzanich took over.
I realize that move has little bearing to the present, though I typically believe that high-quality, mega-cap operations like Intel aren’t dependent on just one person to succeed, and when billions of dollars are shed from the market cap because of a CEO’s departure, I feel comfortable buying on what I deem to be an overreaction.
This is especially the case after INTC raised both top- and bottom-line guidance during the most recent quarter. FY18 estimates for revenues increased from ~$67.5b to ~$69.5b. The midpoint of FY GAAP EPS estimate is $4.10 a share now, up from $3.85 before. The management is guiding for ~$15b of free cash flow on a non-GAAP basis. All in all, these are numbers that I like to see as a DGI investor.
After Friday’s sell-off, shares are yielding nearly 2.5%. This yield isn’t quite as attractive as it was last time INTC was trading for ~12.7 earnings, but it is still well above the S&P 500’s yield.
I didn’t add to my position on Friday because I’ve become averse to making purchases on Fridays since the trade war spats have begun (a lot of market moving news seems to come out over the weekend). With that said, Intel has moved to the top of my watch list, and assuming nothing major changes before now and then, I will be strongly considering buying share early next week.
Disclosure: I am/we are long INTC, AVGO, NVDA, IBM, CSCO, MSFT.
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.