<You are assuming the future growth rate will be 40%-50%. This is what should determine a stock's P/E. Industry estimates are for future growth of 15%-20%, so a P/E of 23 is above these numbers.>
Intel cannot, and I repeat, cannot be accurately valued using accrual accounting earnings. With the levels of amortization, depreciation, upfront marketing, R&D and tax and revenue deferral INTC participates in, the distortion to earnigns is more than merely significant. The "large" investor value INTC off of discounted cash flows, or more recently economic profit. In order to do this, one must reconcile and adjust the earnings (income) then apply an appropriate risk charge to invested capital.
The risk charge is usually equivalent to the weighed average cost of capital, and the reconciliation to INTC's net looks something like this:
1996
Net Income $3,388
Plus:
Amortization of Goodwill 1
Amortization of Intangibles 367
Deferred Income Taxes 0
Increase in LIFO Reserves 0
Increase in Full-Cost Reserve 0
Increase in Deferred Income/Other Reserves 0
Increase in Net Capitalized Intangibles (R&D, Prod. Dev., Upfront Marketing) 879
Preferred Dividends 0
After-Tax Interest Expense 33
Total Additions 1,280
Less:
Depreciation $1,888
Capital Expenditures $521
% of Sales 2.5%
Invt in Non-Cash Working Capital 0
Total Subtractions $2,409
Free Cash Flow $4,146
Source: rcmfinancial.com |
