TheÂ ModernGraham approachÂ to investing has multiple layers to it. Â Regular readers will be familiar with the first two steps; the first is to determine if the company is suitable for the Defensive Investor or the Enterprising Investor, and the second is to compare the price to theÂ intrinsic value through quantitative analysis. Â The next step in the analysis is to review the company’s management and other qualitative factors to determine how the company may compare to other companies that pass the first two steps. Â In this Company of the Week series, we will delve into more detail about a specific company that performed well in the first two areas. Â This week, the company chosen, Intel Corp, is one of the most undervalued out of all 240+ companies in the ModernGraham database and was recently featured as one of April’s 5 Undervalued Companies for the Defensive Investor.
Results of Recent Valuation
Feel free to reviewÂ ModernGraham’s latest valuation of Intel CorpÂ in detail, or read this summary:
Intel Corp. fares extremely well in the ModernGraham requirements, passing every test of both the Defensive Investor and the Enterprising Investor. Â This is a company that appears to present low risk of financial strife and may present relative safety of principal. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the opportunity. Â An example of further research would be to look into some competitors, such as by a review ofÂ ModernGraham’s valuation of Hewlett-Packard Company (HPQ)Â andÂ ModernGraham’s valuation of Texas Instruments (TXN). Â From a valuation standpoint, the company looks very strong, having grown its EPSmg (normalized earnings) from $0.95 in 2009 to $2.00 for 2013. Â This level of growth easily supports the market’s implied estimate for growth of 2.3%, and the ModernGraham valuation model returns an intrinsic value that exceeds the current market price. Â Therefore, the company appears to be undervalued at the current time.
Price trend compared to the market
In the following chart, you can see that in the last five years, Intel Corp has underperformed the market. Â While Intelligent Investors will know that price trends are not determinative of value or opportunity, they can be helpful in comparing Mr. Market’s behavior toward the company with the valuation. Â Here, it is clear that the market has not viewed the company as favorably as others. Â It is key to delve into some of the fundamentals to determine if that view is justified. Â As explained in the summary above, the market’s view does not seem justified based on the fundamentals but rather it is based solely on speculation of the future.
Earnings Per Share
The primary cause of the market’s speculation is the notion that Intel has missed the mobile market. Â For many, that somehow means the company will falter going forward and not generate the type of returns it has previously shown. Â But it is key to take a longer-term approach. Â Benjamin Graham taught that some of the best opportunities for investment are large companies that have fallen out of favor of the market. Â His reasoning is that “First, they have the resources in capital and brain power to carry them through adversity and back to a satisfactory earnings base. Â Second, the market is likely to respond with reasonable speed to any improvement shown.”
For those reason, Intel presents a strong value opportunity now. Â Looking at the following chart, one can see a long-term history of Intel’s diluted earnings per share. Â It clearly demonstrates that there have been times of trouble for the company, with drops in earnings, but the company has shown a history of resilience and capability of recovering from the dips in earnings. Â Value investors will assume based on this history, rather than speculate about the future, that the same will be seen again.
Dividend Rate & Yield
Dividends are a very important part of any analysis into a company, as they not only indicate management’s willingness to return value to shareholders, but they also indicate an opportunity for the Intelligent Investor to gain a return on the investment outside of capital appreciation. Â In the next chart, we can see Intel has steadily raised its dividend over the years, and the dividend yield is very attractive at 3.44% compared to earlier in the company’s history. Â This is yet another reason why Intel is a strong value opportunity, as the dividends present another source of return over the potential for capital gain.
To me, Intel Corp appears to be a very solid opportunity for value investors. Â The company qualifies for both Defensive Investors and Enterprising Investors, the quantitative analysis using one of Benjamin Graham’s formulas indicates the company is significantly undervalued, and the dividend yield is outstanding. Â I believe this company is a prime example of a large company that has turned unpopular in recent years, and presents strong potential for returns for investors. Â It should be expected based on the company’s history that the earnings will rise again, and in fact the company’s EPSmg (normalized earnings based on five years of earnings history) have continued to rise even though the two most recent single years of EPS have shown drops. Â Further, the dividend yield alone is attractive in this age of very low interest rates.
Warren Buffett has promoted looking at some key management tenets, and I’d like to leave it up to readers to discuss how Intel fulfills (or fails to fulfill) these qualities. Â Please discuss the following in the comments below:
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the company have favorable long-term prospects?
- Is management rational?
- Is management candid with shareholders?
Disclosure:Â Â The author did not hold a position in Intel Corp (INTC) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.