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Strategies & Market Trends : Free Cash Flow as Value Criterion -- Ignore unavailable to you. Want to Upgrade?

To: jbe who wrote (96)	11/2/1997 11:17:00 PM
From: Andrew	Read Replies (2) \| Respond to of 253

Ok, Joan, I'll get the ball rolling on Intel. I've been checking into how much they've been spending to buy back shares. While there has been a slight downward trend in the number of shares outstanding, I would estimate that the majority of this buyback has been to cancel out the dilution due to stock options. Maybe someone who understands the situation better could correct me. This is only intended to get at an FCF-based valuation of Intel. Any discussion of specific fundamentals is probably much better directed to the Intel thread. Suffice it to say that my position is that one should only undertake this sort of valuation if one has done enough fundamental research to have well-developed opinion on future free cash flow. That is, the method I am using depends heavily on reasonably accurate estimates of future FCF's. I'm not suggesting that I can predict the future, just that I'm trying to.<g> Anyone who wants to get the details on the calculations I am doing can consult the detailed explanations I posted earlier on this thread. At every step I will try to make conservative choices - for instance I will try to lowball the rate at which I expect Intel's FCF to grow. I will demand a rate of return (discount rate) considerably higher than the current long bond yield. Further, I will not consider FCF's from beyond 20 years from now to avoid the optimistic expectation of Intel being around "forever". My next post will tabulate selected financials, and valuation based on the following assumptions: Average annual FCF growth rates of 7%, 10% and 15% for ten years, followed by 10 years of 7% growth. I will not count on there being any FCF after that. I will use a discount rate of 9%. The starting FCF will be based on my estimate for the 1997 fiscal year ending in December (based on Value Line's estimates and Intel's June 10Q). I welcome any comments and constructive criticisms on my method or it's results. That's why I'm doing this!<g> Andrew

To: jbe who wrote (96)	11/2/1997 11:18:00 PM
From: Andrew	Respond to of 253

Intel Discounted Future FCF Valuation (see previous post for explanation) Dollar figures in Millions Category 1995 1996 1997 Net Earn. 3566 5157 7170 D&A 1371 1888 2200 Cap. Exp. -3550 -3024 -4450 FCF 1387 4021 4920 Options Cost -1000 -1300 -3000(???) New FCF 387 2721 1920 # Shares 1642 1642 1636 Valuation (without options cost) 7%: $47 10%: $57 15%: $79 Valuation (with options cost) 7%: $18 10%: $22 15%: $31 Andrew

To: jbe who wrote (96)	11/2/1997 11:31:00 PM
From: Andrew	Read Replies (1) \| Respond to of 253

Joan and all: As you can see, if you don't count the cost of repurchasing shares to cover the employee stock option plan, my discounted FCF valuation method suggests that Intel is getting attractive. However, I beleive that these costs are an unavoidable expense in today's business environment, and must be counted as such. Furthermore, these expenses show signs of ballooning out of control (Intel reported that they had already spent 2.2 Billion on share repurchases in the first half of 1997, so it could turn out to be much worse than I estimated!). I'm not even certain that Intel will in the future be able to fully cover it's options obligations, which would allow dilution of shares outstanding. (I don't however claim to be an expert on this subject) Therefore, I'm of the opinion that the second set of numbers in my previous post are a more realistic representation of the real economic value of Intel shares (if one wants to play it safe - I feel my assumptions were very much on the conservative side. Maybe I'll post "best case" numbers later). People who suggest this disagrees with the already "reasonable" P/E on Intel should probably consider how much higher that P/E would look if ALL the costs of paying it's employees were to be included in the income statement. This is disappointing to me, as I was getting very interested in purchasing shares in this great company. As I said before, I would like to hear from anybody who agrees or disagrees. Andrew