Monday, August 31, 2015

Recommended August Buy: Intel Corp.

Ticker INTC (Nasdaq)
Fiscal Year End December
Recent price (Closing Price on August 10, 2015) $29.64
Market Capitalization $138.1 Billion
52 week range $27.62 – $37.90
Enterprise Value to EBIT (last full year) 9.5
EV to EBIT (7 year average earnings) 11.5
Enterprise Value to sustainable Free Cash Flow (last full year) 12.6
EV to SFCF (7 year average earnings) 13.9
Enterprise Value to Book 2.7
EV to Book (7 year average Book value) 3.1

Intel is the largest semiconductor producer in the world. It is largely known to consumers for producing the processors and chipsets in personal computers and notebooks, whether they be Windows-based or Apple. It holds about four fifths of the microprocessor market. The company also dominates in processors for servers, a sizable and growing segment of its overall business as the traditional PC market stagnates. Intel is now also trying to catch up in serving the smartphone and tablet industries, where it was late at producing energy efficient processors for those products. Intel also now has a software security service in its McAfee subsidiary, bought in 2010. It hopes to integrate more security features directly into its hardware.

I identified Intel for notching a score of 8 on Piotroski’s F-Score (I use the 10-point variant detailed in Tobias Carlisle and Wes Gray’s excellent book Quantitative Value, as well as on Wes Gray’s website Alpha Architect). It came up short only on the Current Ratio test and the Free Cash Flow on Assets test. More importantly, Intel is undervalued based on its ratio of Enterprise Value to Average (7 year) Book value, which is just under 3.0 times currently. While this superficially doesn’t seem particularly cheap, it is so in light of Intel generating strong average Returns on invested capital, well above its cost of capital. I estimate its Return on invested capital at 20% over the last 7 years, while I estimate its cost of capital to be 9%. These numbers should roughly indicative of Intel’s future capacity. The PC market, while contracting, is unlikely to completely die out, at least not too soon. Intel’s efforts in the mobile space appear to be starting to pay off and the server segment will continue to do well. Meanwhile, Intel’s financial position appears strong and it certainly has more resources than a lot of its competitors. Therefore I recommend it as a buy.

Disclosure: I own shares in Intel Corp.

Intel Corp Aug 2014 to Aug 2015