By
F.A.S.T.
Graphs
:
Intel Corp (
INTC
) is trading at one of the lowest price earnings ratios in its
history. Apparently the market must feel that PCs are dead, and
therefore, so is Intel. However, we believe most of the weakness in
PCs can be attributed to buyers holding back as they await the
release of Windows8. Consequently, we believe that Intel represents
an extremely attractive opportunity to buy this technology
bellwether at a bargain valuation while simultaneously earning a
generous and growing dividend yield.
Earnings Determine Market Price: The following earnings and
price correlated
FAST
Graphs™
clearly illustrates the importance of earnings. The Earnings Growth
Rate Line or True Worth™ Line (orange line with white triangles) is
correlated with the historical stock price line. On graph after
graph the lines will move in tandem. If the stock price strays away
from the earnings line (over or under), inevitably it will come
back to earnings.
Earnings & Price Correlated
Fundamentals-at-a-Glance
A quick glance at the historical earnings and price correlated
FAST Graphs™ on Intel Corp paints a vivid picture of significant
undervaluation based upon the historical earnings growth rate of
15.4% and a current PE of 9.9. Clearly, Intel's earnings growth
rate has accelerated since the great recession of 2008. However, we
believe the expected weakness for 2012 is as we previously stated,
mostly attributed to delayed purchases pending Windows 8.
Currently, analysts are forecasting the earnings growth to
average about 10% a year starting in 2014 and beyond. However,
concerns for 2013 are still low. Nevertheless, even if 2013
generates the muted growth rate expected, we would argue that Intel
with a 4% dividend yield is worth at least 15 times earnings (the
orange line on the graphic below).
Intel Corp: Historical Earnings, Price, Dividends and
Normal PE Since 2009
For a more comprehensive look at a bullish case for the
long-term opportunity in front on Intel, we direct you to the
following excellent article entitled
Intel: There's Certainly A Bull Case
by Ashraf Eassa.
Moreover, in order to conduct your own research and get a
clearer perspective on Intel's valuation, click on the picture
below that links you to a fully functioning sample F.A.S.T. Graphs™
on Intel and research this high-quality dividend growth stock
deeper and faster.
Performance Table Intel Corp
The associated performance results with the earnings and price
correlated graph, validates the principles regarding the two
components of total return; capital appreciation and dividend
income. Dividends are included in the total return calculation and
are assumed paid, but not reinvested.
When presented separately like this, the additional rate of
return a dividend paying stock produces for shareholders becomes
undeniably evident. In addition to the 12.4% capital appreciation
(green circle), long-term shareholders of Intel Corp, assuming an
initial investment of $1,000, would have received an additional
$178.54 in dividends that increased their total return from 12.4%
to 15.7% per annum versus 13.9% in the S&P 500.
(click to enlarge)
The following graph plots the historical PE ratio (the dark blue
line) in conjunction with 10-year Treasury note interest. Notice
that the current price earnings ratio on this quality company is as
low as it has been since 2009.
(click to enlarge)
A further indication of valuation can be seen by examining a
company's current price to sales ratio relative to its historical
price to sales ratio. The current price to sales ratio for Intel
Corp is 2.09 which is historically low.
(click to enlarge)
Looking to the Future
Extensive research has provided a preponderance of conclusive
evidence that future long-term returns are a function of two
critical determinants:
1. The rate of change (growth rate) of the company's
earnings
2. The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound
valuations, is the key to safe, sound, and profitable
performance.
The Estimated Earnings and Return Calculator Tool is a simple
yet powerful resource that empowers the user to calculate and run
various investing scenarios that generate precise rate of return
potentialities. Thinking the investment through to its logical
conclusion is an important component towards making sound and
prudent commonsense investing decisions.
The consensus of 23 leading analysts reporting to Capital IQ
forecast Intel Corp's long-term earnings growth at 10% (orange
circle). Intel Corp has low long-term debt at 13% of capital. Intel
Corp is currently trading at a P/E of 9.9, which is below the value
corridor (defined by the five orange lines) of a maximum P/E of 18.
If the earnings materialize as forecast, Intel Corp's True Worth™
valuation would be $50.73 at the end of 2018 (brown circle on EYE
Chart), which would be a 19.4% annual rate of return from the
current price (yellow highlighting).
(click to enlarge)
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value
from the future cash flows (earnings) they are capable of
generating for their stakeholders over time. Therefore, because
Earnings Determine Market Price in the long run, we expect the
future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other
investments, it is useful to compare investing in any prospective
company to that of a comparable investment in low risk Treasury
bonds. Comparing an investment in Intel Corp to an equal investment
in 10 year Treasury bonds, illustrates that Intel Corp's expected
earnings would be 9.2 (purple circle) times that of the 10 Year
T-Bond Interest. (See EYE chart below). This is the essence of the
importance of proper valuation as a critical investing
component.
(click to enlarge)
Summary & Conclusions
This report presented essential "fundamentals at a glance"
illustrating the past and present valuation based on earnings
achievements as reported. Future forecasts for earnings growth are
based on the consensus of leading analysts. Although, with just a
quick glance you can know a lot about the company, it's imperative
that the reader conducts their own due diligence in order to
validate whether the consensus estimates seem reasonable or
not.
Disclosure:
I am long [[INTC]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
this article.
Disclaimer:
The opinions in this document are for informational and
educational purposes only and should not be construed as a
recommendation to buy or sell the stocks mentioned or to solicit
transactions or clients. Past performance of the companies
discussed may not continue and the companies may not achieve the
earnings growth as predicted. The information in this document is
believed to be accurate, but under no circumstances should a
person act upon the information contained within. We do not
recommend that anyone act upon any investment information without
first consulting an investment advisor as to the suitability of
such investments for his specific situation.
A comprehensive due diligence effort is recommended.
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