Is Intel overvalued ?
The question is provocative on purpose, however I am not
sure I am using the right data. Hopefully this will
trigger a discussion.
The model I use calls for a comparison of the market cap with
the company "market value" as defined in the book
"The Warren Buffet way", by Robert G. Hagstrom, Jr.
- Jon Wiley& Sons, Inc. pages 106-107. The market value
is a function of the company cash-flow, diminished by the capital
expenditures, that according to Warren are necessary to sustain
the business of a manufacturing company. This term is also called
"owners' earnings " by Warren. The key equation, showing the owners'
earnings as the right-hand-side (RHS) is as follows :
Value * interest_rate = cash_flow - capital_expenditures
or
Value * interest_rate = net_earnings + depreciation+ amortization -cap_expI use the following data based on 1997 financial statements :
cash_flow = $10 B
capital_expenditure="addition to property, plants and equipment" = $4.5B
(Note: this could be wrong, comments please )
interest_rate= T-bond yield = 0.05 (Warren does the same)
One determines from the above that the value is $110B.
This is lower than Intel market cap of approx. $150B, based on
$84 per share and 1795 M outstanding shares,assuming dilution.
Hence the valuation question.
If however, capital expenditures were to diminish overtime,
the "owners' earning" term
of the equation (RHS) would be larger and the company may be fairly valued
or even undervalued (note that was the case for the Washington Post
Company discussed in the book).
Also, Intel may be able to control prices, which would affect the interest rate term, in a way that is however unknown to me.
Note : this is not the only cryteria in Warren's method, but it's
kind of an important one. It looks like Intel would score very well
on the other cryteria outlined in the book. |
