1. Business Valuation Report for Intel Corporation
Prepared for:
Prof. John Stowe
MFE 6220 - EQUITIES
Department of Economics
Ohio University
April 30, 2015
Melih Komuscu, MFE Program Student
2. [1]
TABLE OF CONTENTS PAGE
Description of the Project ……………………………………………….……..…………………… 3
Information Sources ………………………………………………………….……..……………….. 3
Business Summary …………………………………………………………….………..…………….. 3
Associated Business Risks ………………………………………………………………………….. 6
Business Valuation Approaches and Methods …………………..………………………… 8
Judgment of the Valuation Results ……………………………………..………………………. 15
References …………………………………………………………………………..…………………….. 16
3. [2]
List of Tables
Figure 1. Annual Revenue
Figure 2. Annual net Income
Figure 3. Annual Earning Per Share
Figure 4. Annual EBITDA
Figure 5. Annual Free Cash Flow
Figure 6. Historical Values of the Adjusted Close Shares for Intel Corporation
List of Tables
Table 1. DDM Value with a Single Holding Period
Table 2. Gordon Growth Model for Dividend Valuation
Table 3. Two-Stage DDM Model
Table 4. FCFF and FCFE Valuations for the Intel’s Shares
Table 5. Residual Income Valuation for the Intel Shares
Table 6. Summary of the Market Multipliers
4. [3]
1. DESCRIPTION OF THE PROJECT
The purpose of this project report is solely to provide an independent valuation opinion in
order to assist investors who plan to buy Intel Corporation stock. As such, this restricted
valuation report is intended for use by individuals and investors only. Intel Corporation designs,
manufactures and sells computer components and related products.
2. INFORMATION SOURCES
During the valuation process I have reviewed the business financial statements and financial
data, which have been provided by the financial various sources, including Morningstar, Yahoo
Finance, and NASDAQ. It was assumed that these financial statements are true and accurate. I
also accessed the financial statements released by the Intel Corporation itself.
3. BUSINESS SUMMARY
Intel Corporation was founded in 1968 and is based in Santa Clara, California. The Intel
Corporation designs, manufactures, and sells advanced integrated digital technology, primarily
integrated circuits and semiconductors, for industries such as computing and communications.
It is the world's leading semiconductor producer and has been leading the industry since the
inception of the personal computer. The company also offers a wide range of technological
products for data processing, data storage and wired network connectivity products. It
develops and manufactures mobile communications components and offers software products
for endpoint security, network and content security, risk and compliance, and consumer and
mobile security. The company sells its products primarily to original equipment manufacturers,
original design manufacturers, and industrial and communications equipment manufacturers in
the computing and communications industries. The Intel also invests significantly in research
and development (R&D) and this high R&D funding has allowed Intel to maintain its leadership
position in the semiconductor industry.
Intel Corporation is the world's largest semiconductor chip maker, based on revenue. In
accordance with recently published financial statements, Intel Corporation has Current
Valuation of 146.33 B. This is 46.32% higher than that of the Technology sector. The total
revenue of the company in 2014 was 55.8 billion, a 6 percent increase over the 2013 earnings.
Total revenue of the company for the last quarter of 2014 was reported as 14.7 billion, a % 1.3
percent decline compared to the Q3 earnings of 2014. Net income of the company in 2014 was
11.7 Billion, nearly a 22 percent increase over the 2013 income figures. On March 12, 2015,
Intel lowered its 1Q15 revenue forecast due to “softer-than-expected demand for business
desktop PCs.” Lower-than-estimated inventory levels across the PC supply chain also
contributed to the lower revenue outlook. As a result of lower revenue expectations, Intel’s
share declined by 4% during early part of March 2015. In 1Q15, Intel’s (INTC) CCG (Client
Computing Group) segment reported revenue of $7.42 billion—a decline of 8% on a year-over-
year basis. Reduction in the global PC shipments, partially due to slow refreshment of Microsoft
5. [4]
(MSFT) Windows XP, was kept responsible for this segment’s negative growth. Macroeconomic
and currency fluctuations, especially in Europe (EZU), contributed to the decline as well.
Financial statements of the company for 2014 fiscal year indicate a 10.61% return on assets
while the return on equity resulted in 20.51%. Earnings per share in Q4 of 2104 was $2.31, a 22
percent increase over the Q3 of 2013’s earning figure.
Following charts present some figures for the financial status of the Intel Corporation’s. The
company’s revenues are growing in recent years despite fluctuations. The net income of the
company peaked in 2011, declined slightly in the following 2 years but then picked again in
2014.
Figure 1. Annual Revenue
Figure 2. Annual net Income
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenue (in billions) 38,826 35,382 38,334 37,586 35,127 43,623 53,999 53,341 52,708 55,780
0
10,000
20,000
30,000
40,000
50,000
60,000
Revenue (in billions)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net Income (in billions) 8.66 5.04 6.97 5.29 4.36 11.46 12.94 11 9.62 11.7
0
2
4
6
8
10
12
14
Net Income (in billions)
7. [6]
As reflection of the net income, the earnings per share was highest in 2011, and then increased
again after two years of slight drops. A similar trend was observed with the EBITDA figures. On
the other hand, free cash flow figures of the company were more stable during 2013 and 2104
after a sharp decline in 2012.
Figure 6. Historical Values of the Adjusted Close Shares for Intel Corporation
As seen in the above figure, share prices of the company characterized by small fluctuations
between 2005 and 2010, with an exception of s sharp decline in 2009. The prices have been in
rising trend since that drop and are standing around 32$ currently.
4. ASSOCIATED BUSINESS RISKS
As any other company investing in technological products, the Intel Corporation also faces
certain business risks since it operates in highly competitive industries. As stated in previous
section, any decline in PC shipment will impact the revenues adversely. The cyclical industry in
which Intel operates will cause its profitability to fluctuate regardless of how successful it is in
tailoring its processors to new markets. Failure to anticipate and respond to technological and
market developments could damage its ability to compete. At the same time, demand for its
products is highly variable. In recent years, the company experienced declining orders in the
traditional PC market segment, which has been negatively impacted by the growth in ultra-
mobile devices such as tablets and smartphones. In other words, increasing demand for tablets
and smartphones can adversely can affect the PC market, resulting in less demand for
computer chips. Similarly, the semiconductor industry has deeply cyclical trends. Demand in up
cycles is so high that chip manufacturers have trouble keeping up. Similarly, if electronic sales,
particularly PC sales, are slow, demand for chips can plunge. The fact that the semiconductor
industry is more impacted by the notion of consumer demand more than corporate demand,
0
10
20
30
40
50
60
SharePrice(indollars)
Historical Adj Close Shares for Intel
8. [7]
also adds to the overall volatility. The analysts think that any bad strategy by Intel will lead to
AMD capturing market share in the PC market.
Any prolonged delay in process technology by Intel would allow other semiconductor
manufacturers to overwhelm Intel’s lead and or even surpass it. In general terms, the risk
factors that the Intel Corporation can face can be summarized as follow. Those risk factors can
influence financial performance of the company to some extent.
Changes in product demand may harm financial results and are hard to predict
Failure to anticipate and respond to technological and market developments could harm
its ability to compete
Changes in the mix of products sold may harm financial results
Global operations subject us to risks that may harm results of operations and financial
conditions
Failure to meet production targets, resulting in undersupply or oversupply of products,
may harm its business and results of its operations
Having difficulties obtaining the resources or products it needs for manufacturing,
assembling and testing its products, or operating other aspects of our business, which
could harm its ability to meet demand and increase its costs
Changes in product demand, and changes in customers’ product needs, could negatively affect
competitive position of the company and may reduce its revenue, increase its costs, lower its
gross margin percentage, or may even require to write down its assets. In order to be
competitive with its rivals, the Intel Corporation maintains a successful R&D effort, develop
new products and production processes, and improve its existing products and processes ahead
of competitors. Although the R&D efforts are critical to success of the company, the R&D
investments may not generate significant operating income or contribute to its future
operating results for several years and such contributions may not meet its expectations or
even cover the costs of such investments. The company may be unable to develop and market
new products successfully, and the products it invests in and develop may not be well received
by customers.
The risks described above are business-related risks. Surely, there are other risks associated
with macro-economic conditions and political situation. Among the macro-economic risks,
inflation, reductions in economic growth, or recession, can be counted while the political risks
may involve restrictions on access to markets, confiscatory taxation, and expropriation of
assets.
9. [8]
5. BUSINESS VALUATION APPROACHES AND METHODS
The valuation part consists of following sections;
Explanation/justification of assumptions (discount rates, growth rates, CF’s)
DDMs, a single-stage one and a two-stage one
FCFF valuation and FCFE valuation
Residual Income valuation
Valuation based on market multiples
Summary judgment of value
5.1.Explanation and Justification of Assumptions
The procedures employed in the valuation section include actual data for the Intel Corporation
from Morningstar and Nasdaq and some assumptions as well. The input data and assumptions
also vary based on the valuation method and will be explained where necessary.
Based on the data given in Morningstar and Nasdaq, I made the following assumptions.
1. The projected yield of dividends: %3
2. Current dividend per share: $0.90
3. Upcoming dividend: $ 0.24
4. 5-year dividend growth forecast: %10.19, and then % 8 for the next 3 years
5. Required Return on equity: %13.26
5.2.Discounted Dividend Valuation
5.2.1.DDM Value with a Single Holding Period
Table 1. DDM Value with a Single Holding Period
If an investor wishes to buy a share of stock of Intel and hold it for one year, the value of that
share of stock today would be V0 = $31.39. The expected share price of $34.31 is nearly %10
higher than this figure.
DDMValue with a Single Holding Period
Expected price per share in one-year P1= 34.41
Expected Dividend per Share D1= 1.14
Required Rate of Return r= 13.26 0.1326
V0 31.39
10. [9]
5.2.3.Gordon Growth Model
Table 2. Gordon Growth Model for Dividend Valuation
The market price of $32.46, or approximately 8 percent, more than the Gordon growth model
intrinsic value estimate of $30.11. The Intel Corporation appears to be slightly overvalued,
based on the Gordon growth model estimate.
5.2.4DDM Two-Stage Model
Table 3. Two-Stage DDM Model
11. [10]
The INTEL appears to have a dividend policy of recognizing sustainable increases in the level of
earnings with increases in dividends, keeping the dividend payout ratio within a range of 40
percent. Considering the different growth rates, Two-Stage DDM model seems a better choice
for the valuation process. It is forecasted that current dividend of $0.90 will grow by 10 percent
approximately per year during the next 4 years. Thereafter, the growth rate will decline to 9
percent and remain at that level indefinitely. At the end of the year 5, the stock price is
expected to rise to $46.76 per share. If we buy the stock as long as it is below $33.95, a 10
percent increase in dividend will ensure us a 13 % return on our investment.
5.3.FCFF and FCFE valuations
For the valuation, following inputs from the Intel Report were used, and some assumptions
were made where necessary.
• Sales are $55,870 million
• Sales will grow at 6% annually for five years, and then at 4% annually thereafter
• EBIT is 15,995 million and is %28.6 of the sales
• Interest expense is $192 million and will increase proportionately with sales
• Depreciation expense is $8,549 million and will increase proportionately with sales
• Gross investment in plant and equip will be 40% of the increase in sales
• New investment in working capital will be 11,711 million and will increase 5 percent each
year
• Net borrowing will be 20% of the new investment each year.
• The corporate income tax rate is 25.9%
• The before - tax cost of long-term debt is 5.0%
• The equity beta is 0.95, risk-free rate is 4.0%, and equity risk premium is 9% (12.36 % in Intel
Report)
• There are 4,736 million outstanding shares
Here, I tried to find the FCFF and FCFE from the EBIT, using the formula given below.
FCFF= NI+ NCC + Int (1-Tax rate )- FCInv - WCInv
and
FCFE= NI+NCC-FCInv – WCInv + Net borrowing
12. [11]
Table 4. FCFF and FCFE Valuations for the Intel’s Shares
Given the above data, Intel Corporation can use free cash flows to manage its capital structure
to finance its new investments and borrowings. The FCFF seems adequate to cover capital
expenditures. The FCFF, in part, can be used to make dividend payments to the company’s
shareholders. Moreover, since the company has high investments in fixed capital and working
capital, it will have a low FCFE and pay high dividends.
As noticed, the company’s profitability is increasing and generating high returns, and under
such a case the company would increase its net new investment in operating assets to compete
in the sector. The debt financing accompanying the new investments may also increase. While
the terminal value will stand as $34.94 at the year 6, the estimated equity value will be $42.1
with a return rate of %12.55. Since the intrinsic value of the shares ($34.83) is slightly higher
than the current share price ($32.47), the Intel shares are slightly undervalued. On the other
hand, using the $42.1 estimated equity value, Intel is overvalued. In other words, if Intel could
lower their cost of equity the share price would rise closer to the current market value.
13. [12]
5.4.Residual Income Valuation
Table 5. Residual Income Valuation for the Intel Shares
Residual income (RIM) is an estimate of the profit of the company after deducting the cost of all
capital, debt and equity. The residual income model of valuation applied here analyzes the
intrinsic value of equity as the sum of the current book value of equity and the present value of
expected future residual income.
Book value per share is initially $ 2.70. Based on an ROE forecast of 12.36 percent, the ending
book value would be $ 8.11 since the dividends are paid. The intrinsic value of the share price
would be $39.99 in year 5, which correspond to a 20 percent increase. The company was
valued at more than its book value because its ROE exceeded its cost of equity.
The results indicate that the Intel earned enough to cover the cost of equity capital. As a result,
it has positive residual income and it is profitable both in accounting and economic sense.
14. [13]
5.5. Valuation based on Market Multiplies (based on 27 December 2014 actual data for Intel)
Forward P/E based on the current fiscal year
P/E= Stock Price/Earnings per Share (EPS)
P/E= 34.36/2.47
P/E=13.90
Price to Sales (P/S)
P/S= Share Price/Sales per Share
P/S=34.36/11.80
P/S=2.91
Price to Book Value (P/BV)
P/BV= Price/Book Value per Share (PVPS)
P/BV= 34.36/11.80
P/BV=2.91
Price to Operating Profit (P/OP)
Given:
Share: 4,736 million
Operating Income=15,347 million
Then,
Operating Profit per share= 3.24
Share Price=34.36
P/OP= Share Price/Operating Share per Share
P/OP=34.36/3.24
P/OP=10.58
Price to FCFE (P/FCFE)
Number of Shares= 4,376 million
FCFE= 10,456
FCFE/Share= 2.21
Current Share (P)= 32.73
P/FCFE= 32.73/2.21
P/FCFE=14.82
15. [14]
Price to Dividends (P/D)
P/D= Annual Dividend/Stock Price per Share
P/D= 0.90/32.73
P/D= % 2.74
Other EV Multiples
EV/EBITDA
Given Data in Actual Figures from the Intel Reports:
Short-term debt: 1,604
Long-term debt: 12,107
Short-term Investment: 11,493
Cash & Cash Equivalency: 2,561
Trading Assets: 4,446
Total Equity= Stock price X Number of shares
Total Equity: 31.49 x 4,736,000
Total Equity: 149,136,000
EV= 144,347
EBITDA=23,896
EV/EBITDA= 6.04
EV/EBITDA is 6.04, which is lower than its benchmarks (for example Technology has 10.19
value). Therefore, the company is relatively undervalued.
EV/FCFF
Given the actual data;
EV= 144,347
FCFF=10,221
Then,
EV/FCFF= 14.12
16. [15]
Market Multipliers Results
P/E 13.9
P/S 2.91
P/BV 2.91
P/OP 10.58
P/FCFE 14.82
P/D 2.74
EV/EBITDA 6.04
EV/FCFF 14.12
Table 6. Summary of the Market Multipliers
6. JUDGEMENT OF THE VALUATION RESULTS
In this report, a number of methods were used for the valuation of the Intel Corporation’s
based on its current and historical financial statements.
As a general comment based on the company’s financial statements, one can argue that Intel
Corp.'s net revenue, operation income, income before taxes, and net income declined from
2012 to 2013 but then increased from 2013 to 2014.
With the current data, return for equity of Intel is %20.6. For most industries Return on
Equity between 10% and 30% are considered desirable to provide dividends to owners
and have funds for future growth of the company.
Intel’s return on asset is currently %10.61. A low ROA typically means that a company is
asset-intensive and therefore will needs more money to continue generating revenue in
the future.
The calculated P/E ratio is 13.90. This is 75.28% lower than that of the Technology
sector, and 82.99% lower than that of Semiconductor - Broad Line industry.
Based on our analysis, the price to book indicator of Intel Corporation is roughly 2.91
times. This low P/BV ratio generally implies that the firm is undervalued. A ratio of 2.91
(bigger than 1.0) indicates that the firm is creating value for its stockholders.
Price to Sales ratio (P/S) for Intel is 2.91. This ratio is typically used for valuing equity
relative to its own past performance as well as to performance of other companies or
market indexes. In most cases, the lower the ratio the better it is for investors.
Therefore, the low P/S ratio puts the Intel in a very good position in terms of value of its
equity. But on the other hand, the low P/S ratio indicates a sluggish sales growth. This
price is small because Intel has a significantly higher amount of shares outstanding than
its competitors, while increasing the Price/Sales ratio.
The company’s forward P/E based on the 2014 fiscal year is 13.90. It is slightly higher
than the higher than its trailing P/E but lower than the S&P 500's forward P/E of 15.20.
17. [16]
Investors therefore see more value in the company's future earnings but not as much as
they see in the market in general.
From a value perspective, we look at how much bigger the company's market
capitalization is than its latest operating profits after subtracting taxes. By this measure
Intel Corporation is priced very attractively with a total value of $156.38 billion, only
7.72 times higher than its latest quarterly net income plus depreciation.
Intel’s EBITDA is around 23.8 billion, which puts the company in a top position among
related companies in the sector.
The market price of $32.46, or approximately 8 percent, more than the Gordon growth
model intrinsic value estimate of $30.11. The Intel Corporation appears to be
overvalued, based on the Gordon growth model estimate.
I predict free cash flows into the firm to steadily increase and see this trend continuing
into the future. The FCFF seems adequate to cover capital expenditures. The FCFF, in
part, can be used to make dividend payments to the company’s shareholders.
Moreover, since the company has high investments in fixed capital and working capital,
it will have a low FCFE and pay high dividends. While the terminal value will stand as
$34.94 at the year 6, the estimated equity value will be $42.1 with a return rate of
%12.55. Since the intrinsic value of the shares ($34.83) is slightly higher than the
current share price ($32.47), the Intel shares are slightly undervalued. On the other
hand, using the $42.1 estimated equity value, Intel is overvalued. In other words, if Intel
could lower their cost of equity the share price would rise closer to the current market
value.
7. References
Equity Asset Valuation, John Wiley & Sons, Inc., 2nd Edition, 2010, by Jerald E. Pinto,
Elaine Henry, Thomas R. Robinson, and John D. Stowe. ISBN-13 9780471571439
Intel’s 2014 Annual Report
Web Sources:
o www.cfainstitute.org
o www.intel.com
o www.txn.com
o www.morningstar.com
o www.nasdaq.com
o www.yahoo.finance.com
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TABLE OF CONTENTS PAGE
Description of the Project ……………………………………………….……..…………………… 3
Information Sources ………………………………………………………….……..……………….. 3
Business Summary …………………………………………………………….………..…………….. 3
Associated Business Risks ………………………………………………………………………….. 6
Business Valuation Approaches and Methods …………………..………………………… 8
Judgment of the Valuation Results ……………………………………..………………………. 15
References …………………………………………………………………………..…………………….. 16](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)