Sunday, March 26, 2006

Intel for value investors

Recently Intel shares have fallen so dramatically that the stock has almost become cheap. Noise traders have taken AMD's recent success and extrapolated that to Intel's complete failure. Historically the semiconductor industry has been too volatile and too overvalued to get attention from value investors. Trading below $20 a share, Intel shares are too cheap to ignore.

  1. Right now Intel is trading with a price to book ratio of 3.22-1. While capitalization of intangibles is the root of overvaluation: in the case of Intel the company's acquired knowledge and expertise is an asset. Intel's organizational knowledge is intangible, but it is also hard for Intel's competitors to replicate and a source of competitive advantage. If we assume that the value of R&D decays by 33% year (I.e. becomes worthless in 3 years), then Intel has an "R&D Asset" of [ 5.145+4.778*0.66+4.360*0.33=9.74 Billion] on the book. Recalculating P/B ratio to include accumulated R&D gives us a P/B ratio of 2.67.

  2. Cash flow return on Operating Assets. Intel is a cash machine. If we divided Cash flow from Operations by Operating Assets (Total Assets - Cash) [14823/(48314-8782)]= 37.5% Cash return on assets. Intel is returning that cash to shareholders with a dividend of $0.40 a share giving a dividend yield of 2.0%.

  3. Intel processors are everywhere, and the company has a very solid balance sheet. The long term outlook is positive. The company has international business throughout the world. The company is well positioned for solid profitable growth for many years into the future. Intel has access to more capital than its competitors, and so has much greater operational flexibility than its competitors.

  4. The technology sector is one of "Live by the puff-- Die by the puff". It is very faddish. Google's stock price is typical of the endless thirst for growth stocks at any price. Eventually Intel will return to favor. With shares of INTC trading below $19.80, Intel is cheap and merits a closer look. (FD: I do not have any shares of Intel)

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