Intel – Buyable at 31 and lower
|March 14, 2016||Posted by Oddmund Grøtte under Stock Analysis|
Share price when article published: 31.5 USD
Intel is a very profitable company, albeit not growing as much as it used to. Here are the numbers from 2006 until end of 2015:
|Revenue USD Mil||4.58|
|Gross Margin %||1.97|
|Operating Income USD Mil||9.50|
|Operating Margin %||4.69|
|Net Income USD Mil||8.51|
|Earnings Per Share USD||10.48|
|Operating Cash Flow USD Mil||6.00|
|Free Cash Flow Per Share USD||13.44|
Worth noting is the annual decrease in outstanding shares of 1.82% and average growth in EPS of 10.48%. Free cashflow per share has also grown a respectable 13.44%. Margins has also improved a bit over the period.
This chart illustrates the turnover/revenue and the free cashflow:
Worth noting is the amount of free cashflow generated from each dollar in revenue: on average 23 cents over the last 10 years! That is pretty impressive. This leads to high return on equity and invested capital:
Balance sheet analysis:
Intel has very little debt, just 40% of assets:
This is pretty low compared to any company of this size. Free cashflow of 2015 equals 25% of all liabilities. Intel has about 25 bn in cash. Excess cash is about 1 dollar per share.
Intel has paid a dividend at least since 1992 and increased it every year since 2003. It’s been growing annually at about 9% since 2006, but going forward we will see a lower growth. In 2006 the quarterly dividend has been raised to 26 cents from 24 cents. This is a respectable 1,04 dollar per year, which yields 3.35% at todays stock price of 31 USD. This is a pretty good yield and even better is that there is room for more in the future. Here is the last 10 years payout ratio:
As we can see, compared both to net income and free cashflow the payout ratio is at quite low levels: this means room for future increases. Because of the low debt ratio the dividend is very safe.
Intel has been a consistent buyer of its own stock. Over the last 10 years outstanding shares have fallen by 17%. I assume Intel will continue with its shareholder friendly policy of returning cash to shareholders by buying back shares and increasing dividends. Over the last 3 years about 80% of free cashflow has been returned.
Stock price today: 31.5 USD
Intel is not particularly cheap based on its own historical levels. It has been a huge PE compression since the dot-com bubble burst, but this mainly took place before 2005. At a price of 31 the PE based on average last 3 years net income is 13.9. If using a historical ROIC of 15% then PE for 2016 is about 11.7. This is pretty low compared to S&P 500 average of almost 20. Free cashflow per share is about the same multiple.
My buy price using margin of safety of 30% is 31 USD. Considering excess cash of one dollar per share one can argue you are only paying 30 USD at todays prices. Hence, I believe any purchase below this level should offer a good risk/reward.
Because of the low valuation, wide economic moat, profitability and clean balance sheet, I believe the downside is limited: it will most likely outperform S&P 500 if the market drops. And opposite, during the last 5% rises in S&P 500 Intel has outperformed. Intel is not a cyclical company and should be more “recession proof” than the average stock.
I own shares of INTC.