Investor Essentials Daily

A well-established giant is looking to pull off an aggressive strategy transformation

Intel Corporation (INTC)
June 1, 2021

With new leadership presenting robust business strategies, investors may suspect nothing could go wrong for this company, especially as the name is already trading so cheaply.

However, when digging further into the business and after bad accounting is taken care of, a different story may arise.

Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.

Investor Essentials Daily:
Tuesday Tearsheets
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Intel (INTC) is one of the largest players in the semiconductor space, with a market capitalization of around $220 billion today.

The company designs and sells computer products and technologies. It also offers networking, data storage, and communications platforms to its customers.

Although the company has evidently been quite successful over the years, Intel has been struggling to find itself for some time now.

The company has seen competition coming from major companies such as Advanced Micro Devices (AMD) in its computer chip business.

It has also seen stiff competition from lower cost ARM solutions in its server business.

Additionally, specialized semi chip players have been beating Intel in various markets.

These three main factors have led the company to rethink its overall strategy.

As a result, we paid attention when Intel’s previous CEO, Brian Krzanich, decided to take the company in a brand new direction.

Most people thought the company would lean towards becoming a more asset-light fabless chip provider under Krzanich’s leadership.

However, the exact opposite occurred.

Krzanich decided to go all in on building as many semiconductor fabrication plants as the company possibly could.

These actions show Intel wants to become a U.S. powerhouse at making not just Intel’s chips, but everyone else’s chips as well.

Intel wants to become the U.S. response to one of the market leaders in chip manufacturing, Taiwan Semiconductors (TSM).

As the largest fab manufacturer in an environment where most people need more and more chips, Taiwan Semiconductor is the winner. And the market clearly believes it.

The market’s average price to earnings ratio (P/E) is 20x. Looking at Intel’s valuation, the company appears to be much cheaper under GAAP metrics given its 13x P/E on an as-reported basis.

If the company and its executives can execute on its initiatives, it would appear there is massive potential for multiple expansion.

In reality, this is not an accurate picture of Intel’s valuation.

The company is not trading as cheaply as it seems. The firm is really trading at an 18x P/E multiple, making it more expensive than investors believe.

When looking through a Uniform Accounting lens, it becomes clear management’s bullish plan is being taken into account by the market.

While investors may not like the reality, it is more reasonable given potential upside if the company’s plan plays out.

By looking at the real data, investors can see that Intel is not trading nearly at such a large discount against the market. Therefore, if its strategy does fall through, significant downside could be in store.

SUMMARY and Intel Corporation Tearsheet

As the Uniform Accounting tearsheet for Intel Corporation (INTC:USA) highlights, the Uniform P/E trades at 18.4x, which is below the global corporate average of 23.7x, but above its own historical average of 15.5x.

Low P/Es require low EPS growth to sustain them. That said, in the case of Intel, the company has recently shown a 6% Uniform EPS growth.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Intel’s Wall Street analyst-driven forecast is a 25% EPS shrinkage in 2021 and 7% EPS growth in 2022.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Intel’s $57 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 7% annually over the next three years. What Wall Street analysts expect for Intel’s earnings growth is below what the current stock market valuation requires in 2021 but above its requirement in 2022.

Furthermore, the company’s earning power is 2x the long-run corporate average. Also, intrinsic credit risk is 30bps above the risk-free rate and cash flows and cash on hand are around 1.8x its total obligations—including debt maturities, capex maintenance, and dividends. All in all, this signals a low dividend and credit risk.

To conclude, Intel’s Uniform earnings growth is below its peer averages, and the company is trading below average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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