o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Operating Earnings (OI)
o Enterprise Value (EV)
o Price-to-earnings Ratio (PE)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
Intel is engaged in the semiconductor industry. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
·The % of shares short is <5%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·Corporate insiders bought shares not too far from current prices in the last 3 months
·The company has a tough year-over-year comparison in the upcoming quarter
·Operating Profit Margins are down sequentially and year-over-year
·The balance sheet only seems fair, exhibiting negative Net Current Asset Value
Those pros and cons and—more importantly—the company’s average ROIC (~15% over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. However, INTC is experiencing a downturn in profitability, so to be conservative, I’m currently valuing the company as if it were not good, i.e. relative to its liquidation value, TBV of $16.89. Given the company’s seemingly fair balance sheet, and 5-yr average multiple of BV x 2.7**, I think TBV x 1 is a reasonably conservative fair value, which equates to MFV of $16.89.
At a recent price of $27.95, the differential between market value and MFV is 65%, thus I think shares are currently overvalued.
Conclusion: I own shares. I bought them seven months ago at $37.44, when that was equal to MFV. Over the subsequent quarters, as profitability cratered, so did my valuation. One of things I like about rules-based investing (https://www.veriteventures.com/post/what-is-investing) is that it can help minimize mistakes. I only take a small position in a company to start—no matter how confident I feel—and don’t add to the position unless the stock drops to a certain discount to MFV AND I’ve seen at least one new quarter of results.
I generally become a net-seller of a stock when it trades at MFV+50%. But, for now I’m holding onto my initial shares. The drop in price has reduced the position size already and it’s not just INTC’s historical ROIC that made me think it’s likely the company has durable competitive advantages. The company has also grown BV by more than 50% over five years (including growth in the last quarter despite the downturn in profitability). So, if that trend remains intact, and ROIC doesn’t drop much further, I will likely hold onto my position.
My positioning: Long shares
For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)
For more information about how and why I designate companies not good read here: (https://www.veriteventures.com/post/how-i-value-most-assets-companies)
*Post prepared using data as of 1/30/23
**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.