Intel is a cyclical growth company. As such it should be bought at a discount to the S&P500. The good news is Intel currently trades at a discount with a ttm P/E of 12.46. Investors are likely to pay a premium during Intel’s next cyclical upswing and its earnings are likely to grow at a comparable rate to the S&P500. Without looking further I can conclude Intel will outperform the S&P500 going forward. But hey that’s probably not enough to convince you and frankly I’d also like to dig a little deeper.

You want numbers? Well look no further than the Value Line Report on INTC.

Prefer graphic representations?

• BMW Method INTC 20 Year Chart
• M* Charts for INTC

If you’d prefer it all spelled out, I’ll try my best.

Thesis

Intel is currently valued attractively and is well positioned to benefit from the fourth wave of semiconductor adoption. As earnings rise, multiples will also expand resulting in good to excellent returns for current buyers.

All of the following metrics are the lowest in 10 years.

• Price except for 2002 low, prior 1996
• Price/Book
• Price/Cash Flow
• Price/Earnings
• Price/Sales

Valuation

There are two basic types of valuation; Discounted Cash Flow (DCF) and Relative valuations. Within relative valuations you then need to choose the best type for the company you are looking at. According to Damodaran PEG is best for high growth companies, while cyclicals are better valued using P/E or relative P/E often with normalized earnings. I’ve done a simple P/E valuation below, but first let’s look at another valuation technique.

Intel is one of the greatest growth stories ever. For those who have read Value Investing From Graham to Buffett and Beyond by Bruce Greenwald et al you’ll know Intel has offered a few opportunities for outstanding returns beyond what the average buy and hold investor has achieved. Greenwald showed a way to have timed investments in Intel based on fundamental analysis.

“Had an investor been disciplined or fortunate enough to load up on Intel every time its market value came within hailing distance of its adjusted book, the results would have been excellent.” Greenwald

So where does Intel stand now? We know at the current Price/Book of 2.23 is the lowest in 10 years and going back to 1975 P/B has only dipped this low four other times. Greenwald included R&D and marketing adjustments to arrive at an adjusted book value. I have used slightly easier, though roughly equivalent formulas to Greenwald, to arrive at the following figures.




The adjusted book ratio has only been lower three other times; 1982, ‘86 and ‘88. Each of those times the price fell close to the adjusted book value. So if history holds true the current ratio indicates an excellent entry point, though the possible bottom for Intel is around $4 lower at $11. But what about the reward? How high could Intel go?

Ben Graham recommended using average earnings from the last ten years to value cyclical companies. As Intel is still a growth company I suggest using some growth factor on top of the 10year earnings average of $1.01. I decided to use Value Line’s eps estimates in the following simple P/E valuation.






Conclusion

Valuations metrics point to good returns, just how could remains to be seen. For your own estimates you need to weigh the probabilities of earnings and the P/E investors will be willing to pay. Every growth company at some point provides an outstanding entry price, why bother buying or adding at any other point. Intel is attractive at the current price and should outperform the S&P500, but with bargains abound I’m happy to wait and for the possibility of a even better entry point.

More Information

Key Statistics

http://finance.yahoo.com/q/ks?s=INTC

With a beta of 1.51 Intel has been more volatile than the S&P. As a cyclical company that is to be expected. Due to the volatility of their cyclical business Intel wisely keep their financial leverage low, with a total debt to equity of 0.051. Leverage increases risk and hence volatility.

Other documents

• Intel 2007 Annual Report
• Valuation of Cyclical Companies
• My Intel Spreadsheet