Storytelling With Data
Storytelling with data is a series of articles analysing a company’s past operating performance and the valuation of its stock. The charts are generated from ten years worth of financial data and visualized on a dashboard developed by me. I will occasionally feature a company, give my analysis and finally value the company using the Discounted Cash Flow model and Dividend Discount Model. Do note that the analysis is on the visualized data and not a deep dive into the management’s strategy. This article will feature the world’s largest and highest valued semiconductor chip manufacturer: Intel Corporation.
The global economy has accelerated towards digitization, automation, cloud computing and adoption of machine learning. What was seen as a means to increase productivity and to develop a competitive advantage is now deem necessary for business survival. Intel is very well positioned to ride on these macro-trends. Its component is found in most of the modern computers. As of 2019, 52% of the company’s revenue was attained from selling PC components, 33% from providing data center services, and 5% was from providing Internet-of-Things (IOT) solutions. All of these segments have ample room to grow given the aforementioned macro-trends in the coming decades.
Intel’s revenue had been fairly consistent from 2010 to 2015, and had only begun to grow thereafter. Despite the general increase in revenue over the year, Intel’s net income had been decreasing except for a spike in 2018. This indicate a deteriorating efficiency and the ability to retain revenue as income. Nevertheless, the Return of Equity remains above 20% on most years.
Intel had maintained a very healthy balance sheet of 57-60% in equity and 23-29% in non-current liability. Additionally, due to increased equity value and aggressive share buybacks over the years, the book value of the share had been increasing consistently.
Even though the company had been piling on debts over the years, the debt to equity ratios is only at a healthy level of 0.32. At this level of debt, the company is only spending 1.5% of its gross income on interest payment. Additionally, with the latest reported Free Cash Flow, Intel is able to pay off the debt in less than 2 years if all Free Cash Flow was used for debt repayment. In summary, Intel has a healthy and manageable level of debt.
Like net income, Intel’s Operating Cash Flow was consistent before 2015 and started growing thereafter. 2018 also reported an exceptional growth in Operating Cash Flow. On dividends, Intel had been growing its dividend payout consistently over the past 10 years. Additionally, the payout ratio had been at a sustainable level of below 50%.
My model assumes an expected average market return of 10% and the conservative risk free interest rate of 2%.
For discounted cash flow model, my model projects the next 10 years’ operating cash flow growth using the average growth rate from the last 3 years (16%). Additionally, for conservative measures, the growth rate for year 4 to 10 is capped at 15%. In Intel case, due to the accelerated growth that begun in 2018, the present value of the stock using this formula is $137.92. At the time of writing, the current stock price ($59.62) is considered underpriced according to this valuation. However, this valuation is only valid if the investor believe the company could sustain this growth rate over the next 10 years, and not regress to stagnant performance as seen in 2010-2015.
For dividend discount model, my model projects the future dividend payouts using the lowest dividend growth rate from the last 3 years (4%). The present value of the stock using this formula is $35.38.
Intel is a reputable company with a solid economic moat around the microprocessor manufacturing space and its global distribution network. It has a well proved record in operations and financial management. Looking forward, the company is well positioned for emerging macro-trends that will only accelerate with current economic and political climate. However, the efficiency of the company to convert revenue to net income might continue on a downtrend.
As a dividend stock, Intel is overpriced even though the dividend payout is health and the growth and both sustainable and healthy. On the other hand, Intel might look attractive as a growth stock given the high valuation using the Discounted Cash Flow model. However, investors have to keep in mind that the high intrinsic value is underpinned by the accelerated growth in the recent years. Hence, the valuation from Discounted Cash Flow formula is only valid if the company could sustain the present rate of growth given the opportunities identified in the earlier part of the articles. Investors should still nevertheless invest cautiously.