Although I had been fortunate to benefit from holdings in Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) during much of the tech-heavy bull market, in the middle of last year, Intel Corporation (NASDAQ:INTC) landed on my screener for quality at a reasonable price.
I researched the company and stock with skepticism because of the negative sentiment against the semiconductor blue-chip as being a has-been from the desktop era and woeful turnaround story. So why own Intel during an unprecedented bull market led by growth-oriented industry players such as QUALCOMM (NASDAQ:QCOM), Advanced Micro Devices (NASDAQ:AMD), Micron Technology (NASDAQ:MU), or Wall Street darling NVIDIA (NASDAQ: NVDA)?
Nonetheless, I went long INTC in our family portfolio as influenced by the wisdom of legendary value investor Sir John Templeton. When you uncover a historically quality operator whose stock is trading at a bargain price, focus on backing up the truck ahead of the market instead of conducting analysis paralysis of product viability and growth prospects toward no action. As a result, you will probably win more often than not.
Thus, for this article, I limit the details on semiconductor manufacturing, market potential, and the pending Mobileye spinoff IPO to the company profile and Morningstar moat rating.
In the spirit of Sir John, I aim to highlight a bullish argument based on Intel’s compelling business fundamentals and the discounted value of its stock price, regardless of whether the company is making semiconductor chips or potato chips.
Unless noted, all data presented is sourced from Seeking Alpha and YCharts as of the market close on January 12, 2022; and intended for illustration only.
A complimentary Glossary of Investing Terms is provided in a linked Google Sheet for article brevity and quick reference. The glossary is exclusive to Seeking Alpha readers. It is recommended to open the sheet in a separate window or tab. For convenience, a link back to SA is provided.
Intel Company Profile
INTC is a dividend-paying large-cap stock in the semiconductors industry of the information technology sector.
Intel Corporation designs, manufactures, and sells essential technologies for the cloud, smart, and connected devices for retail, industrial, and consumer uses worldwide. The company operates through DCG, IOTG, Mobileye, NSG, PSG, CCG, and All Other segments. It offers platform products, such as central processing units and chipsets, and system-on-chip and multichip packages; and non-platform or adjacent products comprising accelerators, boards and systems, connectivity products, and memory and storage products. The company also provides Internet of Things products, including high-performance computer solutions for targeted verticals and embedded applications; and computer vision and machine learning-based sensing, data analysis, localization, mapping, and driving policy technology. It serves original equipment manufacturers, original design manufacturers, and cloud service providers. Intel Corporation has a strategic partnership with MILA to develop and apply advances in artificial intelligence methods for enhancing the search in the space of drugs. The company was founded in 1968 and is headquartered in Santa Clara, California.
(Source: Seeking Alpha)
Beat the Market or Average to the Index
I target the major U.S. exchange-traded (NYSE and NASDAQ) common shares of high-quality, dividend-paying companies with market-beating history or potential. The alternative is indexing or being average to the market on both the upside and the downside. Unfortunately, last I checked, less than 25% of common stocks available to trade in the U.S. were outperforming the S&P 500 over the previous 12 months.
I prefer to own a select basket of the few winners and, except for portfolio hedging, avoid the predominance of losers in an index fund.
My focus is on mid-caps and large-caps for wider margins of safety in longer-term investing, leaving the more speculative, albeit worthy, small-caps to the lowest-cost fund managers. Avoided are over-the-the-counter issues (OTC) and micro caps.
Nonetheless, the market cap reflects sentiment. Therefore, I pay less attention to the existing crowd think if the stock is compounding over the long term at a rate as good as, if not better than, expected at purchase.
INTC kept pace in total returns at the start of the post-Great Recession bull market with tech-heavy Invesco QQQ Trust Total Return (NASDAQ:QQQ) and market benchmark SPDR® S&P 500 ETF Trust (NYSE:SPY). Nevertheless, the stock dropped from the race about two years ago, left in the dust by the disruptive growth stories.
The chart below may not present a convincing bullish argument. However, the takeaway is that during the first several years of this epic bull cycle, INTC market performed and occasionally outperformed the S&P.
INTC Shareholder Yields
As part of my due diligence, I average the total shareholder yields on earnings, free cash flow, and dividends to measure how the stock compares to the prevailing yield on the 10 Year Treasury benchmark note.
Earnings Yield
I target an earnings yield of greater than 6 percent or the equivalent of a P/E multiple of below 17 times.
With trailing one-year earnings per share of $5.15, the earnings yield for INTC was 9.24%, comfortably above my 6.00% threshold.
Free Cash Flow Yield
I target a free cash flow yield or FCFY of 7 percent and higher or the equivalent of fewer than 15 times the inverted price-to-free cash flow multiple.
Based on a $4.23 free cash flow per share, the FCFY for INTC was 7.59%, just above my 7.00% threshold.
Dividend Yield
To avoid high-yield equity junk, I limit our family’s portfolio holdings to trailing twelve-month rates below 5 or 6 percent.
The trailing dividend yield for INTC was 2.49%. With a payout ratio of 26.30%, Intel is distributing what appears to be a well-covered, and therefore, safe dividend.
I prefer dividend-paying stocks for compensation in the short-term while waiting for capital gains to compound over the longer term.
Average of Shareholder Yields
Next, I take the average of the three shareholder yields to measure how the stock compares to the prevailing yield on the 10 Year Treasury benchmark note.
The average shareholder yield for INTC was 6.44% vs. 1.75% for the 10 Year Treasury’s prevailing rate.
Intel’s yields on its stock are each and collectively outperforming the 10 Year Treasury. Although stocks are deemed riskier than U.S. bonds, it would be challenging to walk away from an equity position that rewards shareholders at three and half times the government benchmark.
My shareholder yields rating for INTC: Bullish.
INTC Return on Management
I will now explore the fundamentals of Intel, reflecting the performance strength of its senior management.
Revenue Growth
Generally, I avoid owning slices of companies with negative revenue growth.
Intel had low single-digit three-year growth of 4.69% on its top line. I am biased toward established growth instead of executive promises and sell-side analyst projections when analyzing a business.
Widely attributed in part to delays in its technology for next-generation processors and the global chip shortage, the drop in revenue growth in 2020 appears temporary and reversible.
Net Profit Margin
I seek profitable companies to avoid unnecessary speculation. Investors who go long the stocks of money-losing companies should expect to lose money on those investments more often than not.
Intel had a trailing and steady pre-tax net profit margin of 26.89%. I favor companies generating consistent double-digit bottom lines, and a margin above 20%, such as Intel’s, is compelling.
Return on Equity
Return on equity or ROE reveals how much profit a company generates from shareholder investment in the stock. I target an ROE of 15 percent and higher.
Intel had an impressive trailing three-year return on equity of 25.69%, almost twice my threshold for discovering shareholder-friendly management.
Keep in mind that share buybacks can manipulate returns on equity to the upside. For example, although Intel’s board authorized $2.3 billion in repurchases during the first quarter of 2021, in an interview last year, CEO Pat Gelsinger said the company would curb share buybacks to allocate resources for building new factories (Source: Reuters).
Thus, the company’s ROE appears genuine.
Return on Invested Capital
Return on invested capital or ROIC measures how well a company uses its working capital to generate returns. I target an ROIC above 12 percent, although returns on investment had been tanking market-wide during the pandemic.
Intel had a 17.73% three-year trailing return on invested capital, well above my preferred level. Again, a testament to its senior managers as savvy capital allocators, especially during challenging times for the stock price.
Weighted Average Cost of Capital
The ROIC needs to exceed the weighted average cost of capital or WACC by a comfortable margin giving credence to management’s ability to outperform its capital costs.
Intel had a trailing weighted average cost of capital of 4.80% (Source: GuruFocus). The current spread of return on invested capital exceeding costs by more than three and half times reiterates that Intel’s executives are allocating capital resources at productive levels.
In related news, highly regarded CFO David Zinsner will join Intel on January 17 from competitor Micron, replacing George Davis, who announced his retirement.
My return on management rating for INTC: Bullish.
INTC Valuation
Our concentrated family portfolio of dividend-paying common stocks has outperformed the broader market since 2009 based on an equal-weighted average total return of each position vs. the S&P 500 during the same holding periods. Access to The Model Portfolio is, at present, complimentary. Visit my Seeking Alpha Author Profile for the link.
Although Wall Street attempts to convince us otherwise with highly sophisticated valuation models, investing in the stock market is not rocket science. I submit that uncovering the common shares of quality companies temporarily trading at reasonable prices is basic science.
Instead of speculating on potential barn burner growth stocks as I did earlier in my investing career with limited success, I prefer the art of finding the proverbial needle in the haystack before the barn burns to the ground.
As highlighted in my latest book, Build Wealth With Common Stocks: Market-Beating Strategies for the Individual Investor, I rely on four valuation multiples to estimate the intrinsic value of a targeted quality enterprise’s stock price.
Please note that I do not attempt to predict specific future share prices or percentage targets as I view such practices as arbitrary, if unreliable.
Price to Sales
The price-to-sales ratio or P/S measures the stock price relative to revenues. I target a P/S of fewer than 2.0 times.
INTC had a reasonable price to sales ratio of 2.91. Although above my P/S threshold, the stock was a bargain compared to a median P/S of 4.06 for the information technology sector, on the whole, indicating the market is discounting the stock price relative to Intel’s trailing top-line revenue.
Price to Earnings
Although an arbitrary multiple, I target price-to-trailing earnings or P/E of fewer than 17 times or below the target stock’s industry averages.
INTC had a price-to-earnings multiple of 10.82, indicating that market sentiment is deeply discounting the stock price relative to its earnings compared to the tech sector’s median of 24.39 and the S&P 500’s overall PE of 29.33 as of December 31, 2021. (Source of S&P 500 PE: Barron’s)
Price to Operating Cash Flow
I target single-digit price-to-operating cash flows multiples for the best value.
INTC had a single-digit price to cash flow of 6.70, compared to the tech sector’s median of 22.91, indicating the market is deeply discounting the stock price relative to the company’s current cash flows.
Enterprise Value to Operating Earnings
Enterprise value to operating earnings or EV/EBITDA measures whether a stock is overbought, a bearish or neutral signal, or oversold, a bullish or neutral signal, by the market. I target an EV/EBITDA of fewer than 12 times.
INTC had an EV/EBITDA of 6.42, compared to a sector median of 18.58, signaling that the stock was oversold or underbought into value territory.
Margin of Safety
Although Wall Street relies on sophisticated models and formulas projecting future free cash flows and other hypotheses, I am forever wary of the assumptive projections of those methods when estimating the margin of safety in a current stock price.
I am biased toward outstanding companies whose common shares are experiencing out-of-favor market sentiment as suggested by lower ratios of price-to-sales, price-to-earnings, price-to-operating cash flow, and enterprise value to operating earnings. Thus, I weigh the above key indicators to determine the overall market valuation of the targeted company.
The weighting of my four preferred valuation multiples suggests that the market undervalues INTC’s current stock price. Based on the metrics shared in this article, risks and catalysts notwithstanding, I would call INTC an oversold stock of a quality operator left behind in the disruptive technology, hyper-growth-oriented market cycle.
My valuation rating for INTC: Bullish.
INTC Downside Risk
When assessing the downside risks of a company and its common shares, I focus on five metrics that, in my experience as an individual investor and market observer, often predict the potential risk/reward of the investment.
I assign a downside risk-weighted rating of above average, average, below average, or low, biased toward below average and low risk profiles.
Economic Moat
I target companies that possess clear competitive advantages from their products or services. An investor can streamline the value proposition of an enterprise with a moat assignment of wide, narrow, or none.
Morningstar assigns Intel a wide moat rating.
We believe Intel’s wide moat emanates from its superior cost advantages realized in the design and manufacturing of its cutting-edge microprocessors and intangible assets related to its x86 instruction set architecture license and chip design expertise. While the firm has endured significant delays in deploying its latest 10-nanometer process technology, which has allowed foundry Taiwan Semiconductor Manufacturing (TSMC) to leapfrog Intel and AMD to become more competitive via TSMC’s 7-nm process, Intel’s manufacturing advantage over virtually every other chip designer and manufacturer is still intact and durable. Between Intel’s x86 dominance in PC and server CPUs (85%- plus market share in aggregate, per Mercury Research) and aggressive focus on new chip opportunities (AI, automotive, 5G, and so on) we think that excess returns on capital are likely with near certainty over the next decade and it is more likely than not that the chip titan earns excess returns on invested capital over the next twenty years.
— Abhinav Davuluri, CFA, Sector Strategist, April 14, 2021
Long-Term Debt Coverage
A favorite of the legendary value investor Benjamin Graham, long-term debt coverage demonstrates balance sheet liquidity or a company’s capacity to pay down debt in a crisis. Generally, one-and-a-half times current assets to long-term debt is ideal.
As reflected on its September 2021 financial statements, Intel’s long-term debt coverage was 1.72, more than required to cover its long-term debt leveraging needs as a capital-intensive semiconductor manufacturer.
Short-Term Debt Coverage
Current liabilities coverage or current ratio measures the short-term liquidity of the balance sheet. I target higher than 1.00, although a quality company may have a current ratio of less than one because of the industry served.
Intel’s short-term debt coverage or current ratio was 2.07, more than double the requirement to pay down current liabilities such as accounts payable, short-term borrowings, and income taxes.
Stock Price Volatility
As a long-term investor, I use a five-year beta trend line and screen for companies with betas lower than 1.25 or no more than 25% volatility to the market.
INTC’s 60-month trailing beta is 0.51, a reminder that the stock is a defensive play in the high beta world of technology.
Market Sentiment
The short interest as a percentage of the float for INTC was 1.69%, well under my 10% threshold, reflecting the market sentiment of Intel as a slower-growing, although well-run tech company.
When the short interest exceeds 10 percent of the float, I become wary of a speculative deep value play and take heed.
A short trader’s tongue-twister:
Shorts in time are left short and cover their shorts before losing their shirts. (Source: Build Wealth With Common Stocks)
Defer shorting the market to the professionals who confidently walk the tightrope of such speculative practices.
My downside risk rating for INTC: Low.
INTC Catalysts
Events that could accelerate my bullish investment thesis on Intel Corporation include but are not limited to:
- Intel successfully leverages its capacity expansion and plays a key industry role in catching up to global chip demand, returning to attractive top-line growth.
- New CFO Zinsner and the Mobileye IPO spinoff each deliver as expected.
- An extended slowing of market sentiment on disruptive technology stocks propels institutional and retail investors to the low-risk profile and safe dividend of INTC.
Events that could invalidate my investment thesis on Intel include but are not limited to:
- Intel remains a laggard in the semiconductor industry, as predicted by the bears.
- A prolonged bear market and sustained stagflation slow chip demand, both semiconductor and potato.
A Sir John Templeton Quality at Value Play
Last year, Intel landed on my stock screener for quality at a reasonable price. As of this writing, all three shareholder yields on its common stock: earnings, free cash flow, and dividend were convincingly outperforming the 10 Year Treasury.
Intel’s returns on management are compelling despite slowed revenue growth from capacity and technology issues. Moreover, a wide margin of safety based on its valuation multiples and low downside risk should counter an oversold stock of a quality operator temporarily left behind in the disruptive technology, hyper-growth-oriented market cycle.
If alive today, Sir John may have backed up the truck for shares of Intel ahead of the market.