Joel,
Thank you for your informative post. It’s hard to believe you are an engineer, I would have guessed you were an accountant. I would like to make some comments (and ask some questions) about your analysis as it relates to Intel’s valuation (measured as PE).
Do you believe Intel is fairly valued at it’s current PE (18), or is your argument that it is overvalued?
You seem to assume that Intel’s capital expenditure and R&D cost will continue to accelerate as a percentage of earnings. The median analyst estimate for Intel’s 5 year growth rate is 18% (EPS). I don’t have estimates on revenue growth, but I would guess that it would be well above 20%. I think most of us who are long term investors in Intel believe that the capital and R&D expenditures are building infrastructure and technology to lead the growth demands of the future. Will these costs increase at the same rate as revenue / earnings over the next 5 years? I don’t think so, and as an investor I’m willing to use some of my current profits to build a technological lead that maintains a 90%+ market share in a marketplace with very few limits on future growth.
I personally think it’s difficult to compare mature industries / marketplaces with the PC / CPU market from a valuation standpoint (but I will later in this post). Your pipeline analogy (I assume you mean a pipeline built by an oil company) is a one time investment that will produce a fairly reliable revenue stream and profit profile. The company knows what that oil will be used for and can pretty much anticipate demand and price. Intel’s Pentium franchise (and investment), on the other hand, has a strong rationalization for profitability in the PC market. But going forward, the device could be used in everything from coffee makers to TV’s to automobiles.
I believe my analogy about consumer product companies that have to continuously spend money on marketing to maintain their franchise has merit. Lets take Coca Cola (KO) because analyst est. of EPS growth are identical to Intel’s:
PE ratio: KO, 40; INTC, 18
5 year revenue growth: KO, 11.97%; INTC 32.81%
Analyst median EPS growth estimate: (5 year) KO, 18%, INTC 18%
NET profit margin (1995): KO, 16.6%; INTC 22%
FCF/SH. (1st qtr.): KO .20; INTC .82
EPS (1995) KO 1.18; INTC 4.03
Looking at both companies, I would say that Intel was undervalued in comparison. To maintain it’s market share (well below Intel’s 90%+), KO has to virtually sponsor the Olympics. Intel has to maintain it’s R&D and capital spending. Both are expenses, where is the difference?
I guess I feel more comfortable with the cyclical argument when you measure Intel’s valuation. I hope, as Intel’s products are used in more products, the cyclical "label" will go away, and the PE ratio can reflect it growth rate.
On vacation this week or I couldn’t have taken the time for this response. Now I’m off to the links (after all, I’m just a silly golfer {I don’t thinks there is any other kind}).
John |
