A Comparison of Four Listed Companies ($AMZN, $INTC, $NFLX, and $WFC) (MG Book Club Chapter 13)

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A Comparison of Four Listed Companies

This is the thirteenth discussion of the ModernGraham Book Club’s reading of The Intelligent Investor by Benjamin Graham (affiliate link).  In last week’s discussion, we discussed the twelfth chapter, which looked at factors Intelligent Investors should consider when utilizing earnings per share data  This week we will discuss the thirteenth chapter, which is titled “A Comparison of Four Listed Companies.”  I encourage you to purchase the book (preferably by clicking the link to Amazon, because a purchase through that link will help support the club) and join in with us as we read through a chapter each week; however, even if you don’t have the book I think you will find our discussions to be very useful in your own understanding of value investing, and you can still bring a lot to the discussion from your own experiences as an investor.  Whether this is the first day you’ve ever been interested in investing, or you have decades of experience with the stock market, we’d love to hear your thoughts in the comments below!

Please feel free to leave a comment on this post with your own responses to the questions, along with any other thoughts you have, and return throughout the next couple of days to see what others have said. If you find something that has been said by another commentator interesting, feel free to respond to them with another comment.  We’ve had some great discussions throughout the book club, so keep it up!

ModernGraham’s Comments

In this chapter, Graham does exactly what his title eludes to:  he compares four different companies to discuss the applications of some of the concepts he has raised in earlier chapters.  This is a great read for anyone who wants a brief explanation of some of the practical implications of Graham’s methods, and the comparison serves as a good introduction to the chapters that follow.  Of the four companies Graham reviewed, two of them passed all seven of his Defensive Investor requirements, and it is interesting to find that in Zweig’s notes, one of the ones that did not pass the requirements dropped in price by nearly 73% in only 10 years.

This may be a good time to do a quick comparison of four companies today.  Let’s take a look at some key data for Amazon Inc. (AMZN), Intel Corp (INTC), Netflix Inc. (NFLX), and Wells Fargo Co. (WFC):

Defensive Investor Requirements

AMZN INTC NFLX WFC
Adequate Size of Enterprise – market capitalization of at least $2 billion Pass Pass Pass Pass
Sufficiently Strong Financial Condition – current ratio greater than 2 Fail Pass Fail N/A*
Earnings Stability – positive earnings per share for at least 10 straight years Fail Pass Pass Pass
Dividend Record – has paid a dividend for at least 10 straight years Fail Pass Fail Pass
Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period Fail Pass Pass Pass
Moderate PEmg ratio – PEmg is less than 20 Fail Pass Fail Pass
Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 Fail Pass Fail Pass
Score 1 7 3 6

Enterprising Investor Requirements

AMZN INTC NFLX WFC
Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 Fail Pass Pass N/A*
Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 Fail Pass Pass N/A*
Earnings Stability – positive earnings per share for at least 5 years Fail Pass Pass Pass
Dividend Record – currently pays a dividend Fail Pass Fail Pass
Earnings growth – EPSmg greater than 5 years ago Fail Pass Pass Pass
Score 0 5 4 3

*As a financial company, Wells Fargo is not required to pass the tests regarding current assets and current liabilities.

Valuation Summary

AMZN INTC NFLX WFC
Recent Price $297.70 $25.82 $349.88 $49.08
MG Value $0.00 $48.51 $28.04 $124.32
MG Opinion Overvalued Undervalued Overvalued Undervalued
Value Based on 3% Growth $13.00 $28.46 $32.24 $50.5
Value Based on 0% Growth $7.62 $16.68 $18.90 $29.6
Market Implied Growth Rate 213.23% 2.33% 73.36% 2.79%
Net Current Asset Value (NCAV) -$11.88 -$0.67 -$16.40 14.08
PEmg 434.97 13.16 155.21 1.52
Current Ratio 1.07 2.25 1.58 N/A
PB Ratio 19.66 2.21 13.99 N/A

Earnings per Share – ModernGraham

AMZN INTC NFLX WFC
2014 not yet estimated $1.96 $2.22 $3.48
2013 $0.90 $2.00 $2.05 $3.17
2012 $1.21 $1.91 $2.15 $2.59
2011 $1.81 $1.69 $2.81 $2.13
2010 $1.86 $1.27 $1.96 $1.83
2009 $1.41 $0.95 $1.34 $1.73

Analysis

Comparing the four, it is clear that the gems are Intel and Wells Fargo, while the market may be expressing over-exuberance regarding Amazon and Netflix.  After all, Wells Fargo’s EPSmg (normalized earnings) for 2013 were more than four times the amount Amazon earned that year, and yet Amazon’s price is nearly six times the price for Wells Fargo.  In order for that price difference to be justified, Amazon would have to achieve extremely high growth going forward, but the historical data actually shows the company has seen a drop in its EPSmg every year since 2010.

Discussion Questions

Please leave a comment below and feel free to answer any of these questions, or just give your general thoughts.

  1. What quote from this chapter do you think best summarizes the point Graham is making?
  2. When considering potential investments against one another, what factors do you utilize in analysis?

  3. What do you think of Amazon, Intel, Netflix, and/or Wells Fargo?
  4. What four companies would you compare today?
  5. What did you think of the chapter overall?

Next Week’s Discussion: Chapter Fourteen

Chapter Title – Stock Selection for the Defensive Investor

When reading the next chapter, try to think about how the concepts Graham presents in the chapter could apply to your own investments, whether you consider yourself a Defensive Investor or an Enterprising Investor.

What are some other ways to participate?

If you are a blogger, you can give your thoughts in a post on your own site, link to the discussion here on ModernGraham, and I will be sure to let our readers know that the conversation is going on over at your site as well.

In addition, you can use the hashtag #MGBookClub in social media to talk about the book on Twitter or Facebook!

Intel Corp (INTC) Quarterly Valuation – May 2014

500px-Intel-logo.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Defensive Companies.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Intel Corp (INTC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Intel Corporation, incorporated in 1968, designs and manufactures integrated digital technology platforms. A platform consists of a microprocessor and chipset. The Company sells these platforms primarily to original equipment manufacturers (OEMs), original design manufacturers (ODMs), and industrial and communications equipment manufacturers in the computing and communications industries. The Company’s platforms are used in a range of applications, such as personal computers (PCs) (including Ultrabook systems), data centers, tablets, smartphones, automobiles, automated factory systems and medical devices. The Company also develops and sells software and services primarily focused on security and technology integration. In February 2014, M/A-COM Technology Solutions Holdings Inc announced that its subsidiary Mindspeed Technologies Inc completed the sale of assets of its wireless infrastructure business unit to Intel Corporation.

INTC Chart

INTC data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 7/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $25.82
MG Value $48.51
MG Opinion Undervalued
Value Based on 3% Growth $28.46
Value Based on 0% Growth $16.68
Market Implied Growth Rate 2.33%
NCAV -$0.67
PEmg 13.16
Current Ratio 2.25
PB Ratio 2.21

Balance Sheet – 3/29/2014

Current Assets $30,554,000,000
Current Liabilities $13,552,000,000
Total Debt $13,172,000,000
Total Assets $91,932,000,000
Intangible Assets $15,580,000,000
Total Liabilities $33,894,000,000
Outstanding Shares 4,972,000,000

Earnings Per Share

2014 (estimate) $1.74
2013 $1.89
2012 $2.13
2011 $2.39
2010 $2.01
2009 $0.77
2008 $0.92
2007 $1.18
2006 $0.86
2005 $1.40
2004 $1.16

Earnings Per Share – ModernGraham

2014 (estimate) $1.96
2013 $2.00
2012 $1.91
2011 $1.69
2010 $1.27
2009 $0.95

Dividend History

INTC Dividend Chart

INTC Dividend data by YCharts

Conclusion:

Intel Corp is an outstanding company for both Defensive Investors and Enterprising Investors to consider.  The company passes all of the requirements of both investor types.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors by exploring the ModernGraham Valuation Index.  From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.27 in 2010 to an estimated $1.96 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of only 2.33% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Intel Corp (INTC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Intel Corp (INTC) or in 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.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

Company of the Week: Intel Corp (INTC)

image (12)The ModernGraham approach to investing has multiple layers to it.  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 the intrinsic value through quantitative analysis.  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.  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.  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 review ModernGraham’s latest valuation of Intel Corp 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.  This is a company that appears to present low risk of financial strife and may present relative safety of principal.  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.  An example of further research would be to look into some competitors, such as by a review of ModernGraham’s valuation of Hewlett-Packard Company (HPQ) and ModernGraham’s valuation of Texas Instruments (TXN).  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.  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.  Therefore, the company appears to be undervalued at the current time.

Further Analysis

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.  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.  Here, it is clear that the market has not viewed the company as favorably as others.  It is key to delve into some of the fundamentals to determine if that view is justified.  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.
INTC Chart

INTC data by YCharts

Earnings Per Share

The primary cause of the market’s speculation is the notion that Intel has missed the mobile market.  For many, that somehow means the company will falter going forward and not generate the type of returns it has previously shown.  But it is key to take a longer-term approach.  Benjamin Graham taught that some of the best opportunities for investment are large companies that have fallen out of favor of the market.  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.  Second, the market is likely to respond with reasonable speed to any improvement shown.”

For those reason, Intel presents a strong value opportunity now.  Looking at the following chart, one can see a long-term history of Intel’s diluted earnings per share.  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.  Value investors will assume based on this history, rather than speculate about the future, that the same will be seen again.

INTC EPS Diluted (TTM) Chart

INTC EPS Diluted (TTM) data by YCharts

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.  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.  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.

INTC Dividend Chart

INTC Dividend data by YCharts

ModernGraham Conclusion

To me, Intel Corp appears to be a very solid opportunity for value investors.  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.  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.  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.  Further, the dividend yield alone is attractive in this age of very low interest rates.

Management Tenets

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.  Please discuss the following in the comments below:

  1. Is the business simple and understandable?
  2. Does the business have a consistent operating history?
  3. Does the company have favorable long-term prospects?
  4. Is management rational?
  5. Is management candid with shareholders?

Disclosure:  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.

Intel Corp (INTC) Quarterly Valuation

500px-Intel-logo.svg

People like to talk about where Intel fits in the tech world today, often basing their investment decision on whether they think the company will be able to keep up with many of its competitors rather than on whether the financial statements indicate a value opportunity.  Intelligent Investors know to do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Intel Corp. fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Intel Corporation designs and manufactures integrated digital technology platforms. A platform consists of a microprocessor and chipset. The Company’s platforms are used in a range of applications, such as personal computers (PCs) (including Ultrabook systems), data centers, tablets, smartphones, automobiles, automated factory systems and medical devices. In February 2013, it acquired ProFUSION-Comercio e Prestacao de Servicos em Tecnologia da Informacao Ltda. In April 2013, Intel Corp acquired Aepona Ltd. Effective July 16, 2013, Intel Corp acquired Omek Interactive Ltd. Effective August 15, 2013, Intel Corp acquired Fujitsu Semiconductor Wireless Products Inc, from Fujitsu Semiconductor Ltd, a wholly owned subsidiary of Fujitsu Ltd. Effective November 8, 2013, Intel Corp acquired Kno Inc, a developer of educational software.

INTC Chart

INTC data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 7/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $24.76
MG Value $76.82
MG Opinion Undervalued
Value Based on 3% Growth $28.93
Value Based on 0% Growth $16.96
Market Implied Growth Rate 1.95%
NCAV -$0.41
PEmg 12.41
Current Ratio 2.36
PB Ratio 2.11

Balance Sheet – 12/28/2013

Current Assets $32,084,000,000
Current Liabilities $13,568,000,000
Total Debt $13,165,000,000
Total Assets $92,358,000,000
Intangible Assets $15,663,000,000
Total Liabilities $34,102,000,000
Outstanding Shares 4,967,000,000

Earnings Per Share

2013 $1.89
2012 $2.13
2011 $2.39
2010 $2.01
2009 $0.77
2008 $0.92
2007 $1.18
2006 $0.86
2005 $1.40
2004 $1.16
2003 $0.85
2002 $0.46

Earnings Per Share – ModernGraham 

2013 $2.00
2012 $1.91
2011 $1.69
2010 $1.27
2009 $0.95
2008 $1.06

Dividend History

INTC Dividend Chart

INTC Dividend data by YCharts

Conclusion:

Intel Corp. fares extremely well in the ModernGraham requirements, passing every test of both the Defensive Investor and the Enterprising Investor.  This is a company that appears to present low risk of financial strife and may present relative safety of principal.  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.  An example of further research would be to look into some competitors, such as by a review of ModernGraham’s valuation of Hewlett-Packard Company (HPQ) and ModernGraham’s valuation of Texas Instruments (TXN).  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.  This level of growth easily supports the market’s implied estimate for growth of 1.95%, and the ModernGraham valuation model returns an intrinsic value that exceeds the current market price.  Therefore, the company appears to be undervalued at the current time.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Intel Corp (INTC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Intel Corp (INTC) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

ModernGraham Valuation: Intel Corp (INTC)

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Company Profile (obtained from Google Finance): Intel Corporation designs and manufactures integrated digital technology platforms. A platform consists of a microprocessor and chipset. The Company sells these platforms primarily to original equipment manufacturers (OEMs), original design manufacturers (ODMs), and industrial and communications equipment manufacturers in the computing and communications industries. The Company’s platforms are used in a range of applications, such as personal computers (PCs) (including Ultrabook systems), data centers, tablets, smartphones, automobiles, automated factory systems and medical devices. In February 2013, it acquired ProFUSION-Comercio e Prestacao de Servicos em Tecnologia da Informacao Ltda. In April 2013, Intel Corp acquired Aepona Ltd. Effective July 16, 2013, Intel Corp acquired Omek Interactive Ltd. Effective August 15, 2013, Intel Corp acquired Fujitsu Semiconductor Wireless Products Inc, from Fujitsu Semiconductor Ltd, a wholly owned subsidiary of Fujitsu Ltd.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 7/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

MG Value $76.44
MG Opinion Undervalued
Value Based on 3% Growth $28.79
Value Based on 0% Growth $16.88
Market Implied Growth Rate 1.86%
NCAV -$0.75
PEmg 12.21
Current Ratio 2.26
PB Ratio 2.17

Key Data:

Balance Sheet – 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $31,350,000,000
Current Liabilities $13,875,000,000
Total Debt $13,157,000,000
Total Assets $90,551,000,000
Intangible Assets $15,901,000,000
Total Liabilities $35,099,000,000
Outstanding Shares 4,973,000,000

Earnings Per Share – Diluted

2013 (estimate) $1.86
2012 $2.13
2011 $2.39
2010 $2.01
2009 $0.77
2008 $0.92
2007 $1.18
2006 $0.86
2005 $1.4
2004 $1.16
2003 $0.85
2002 $0.46

Earnings Per Share – Modern Graham

2013 (estimate) $1.99
2012 $1.91
2011 $1.69
2010 $1.27
2009 $0.95
2008 $1.06

Conclusion:

Intel Corp is a very strong company, having passed every single requirement of both the Defensive and Enterprising Investors.  In addition, the company appears to be undervalued significantly by Mr. Market.  The market is implying only 1.86% growth in the earnings, but historically the growth rate is much higher.  The EPSmg (normalized earnings) has grown from $1.06 in 2008 to an estimated $1.99 in 2013.  Further, the PEmg is only 12.21, which should be low enough to attract the attention of value investors.  As a result, potential investors should be intrigued by Intel and proceed with further research of the company.

What do you think?  Is Intel Corp undervalued or does Mr. Market have it right?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Intel Corp at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

Company of the Week – Intel Corp (INTC)

The company of the week this week is Intel Corporation (INTC), the semiconductor chip maker whose products are the building blocks for computers, servers, and networking communication devices.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     For Intel, this depends on what part of the business you want to understand.  The actual design and construction of semiconductor chips is an extremely complex realm to be involved in, but since Intel has qualified employees, we do not believe it is necessary for the investor to understand the process himself (or herself).  While it would certainly be beneficial to know how to do it, investors should instead focus on the overall business plan of the company. 

     The company designs the chips that form the “brains” of countless technological devices.  The devices themselves are often designed and created by other firms, but that cements Intel’s role as a part manufacturer.  It may be easier for some investors to think of computers and semiconductors in a way similar to automobiles.  Intel creates the transmission and provides the product to a number of companies who design their own makes and models.

2.  Does the business have a consistent operating history?

     Intel has been operating in the semiconductor business since its inception in 1968.  A glance through the company’s timeline reveals a consistent history of being innovative.  It seems every year or two Intel has introduced a new product that is the first of its kind.  The company has paid a dividend consistently for over 10 years, and has reported 18 consecutive years of positive net income. 

3.  Does the business have favorable long-term prospects?

     Though the company is facing increased competition from Advanced Micro Devices Inc (AMD), Intel is still finding ways to grow.  The last 10 years have seen rapid growth in their international operations.  The company has also developed one of the strongest brands in the world.  According to Business Week, the Intel name is the 5th most valuable brand name.  Coupled with the company’s dominance in their industry, we believe Intel to have developed a very distinguished franchise situation that leads to favorable long-term prospects.

4.  Is management rational?

    We believe management to be rational.  It is important for management of the company to focus on long-term efforts to maximize shareholder return, rather than focus on keeping the stock price high in the short-term.  This is a task that the management at Intel takes to another level.  The management is consistently outlining future plans for the company (see Platform 2015), and targeting certain production levels and technology innovations.  This is a rational view of the business world.  When management fails to look forward and instead focuses on the present entirely, there is cause for concern.  Intel’s management appears to be focused on long-term actions.

5.  Is management candid with its shareholders?

     Intel has one of the best investor relations websites we have seen.  On the site, one can read executive biographies, executive speeches, historical information, financial information, etc.  The company provides an extensive amount of information.  The only thing that could be improved is the navigation.  We often clicked to view something specific and then couldn’t figure out how to return to where we came from.

6.  Does management resist the institutional imperative?

    Intel is an innovator in their field, has been for almost 40 years, and will likely continue to be one going forward.  We are particularly interested in the company’s social responsibility efforts and their contributions to education.  The company has been contributing to educational efforts its entire history, and has contributed a total of over $1 billion.  While this may appear to dilute the earnings for shareholders, we believe it is an example of the management resisting the institutional imperative and continuing to focus on the long-term.  A better educational system improves the outlook for Intel’s hiring practices in the future.
 

Financial and Value Review

Upon our review, we find Intel Corporation to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not suitable for the defensive investor.  The company has not increased earnings per share by at least 33% over the last 10 years, and has a price to book ratio that is too high for the defensive investor.  However, we find the company to have a PE ratio of 19.13, and a return on invested capital of 20.65%.  In addition, we like Intel’s current ratio, dividend history, and profitability history.

We believe the company has potential to reach $23/share in the next few years. 

Neither of us held a position in Intel Corporation at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

 


NetApp Inc Valuation – February 2019 $NTAP

Company Profile (excerpt from Reuters): NetApp, Inc. (NetApp), incorporated on November 1, 2001, provides software, systems and services to manage and store customer data. The Company enables enterprises, service providers, governmental organizations, and partners to envision, deploy and evolve their information technology (IT) environments. The Company offers a portfolio of products and services that satisfy a range of customer workloads across different data types and deployment models. Its data management and storage offerings help manage business productivity, performance and profitability, while providing investment protection and asset utilization. The Company’s FlexPod portfolio includes FlexPod Datacenter for core enterprise data centers and service providers, FlexPod Express for medium-sized businesses and branch offices, and FlexPod Select for data-intensive workloads. The portfolio is validated with hypervisors, operating systems, systems management tools, and cloud management platforms.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of NTAP – February 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $15,979,647,494 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.65 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 39.82% Pass
6. Moderate PEmg Ratio PEmg < 20 31.33 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 10.92 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.65 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.53 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.02
MG Growth Estimate 3.14%
MG Value $29.84
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $29.28
MG Value based on 0% Growth $17.16
Market Implied Growth Rate 11.42%
Current Price $63.27
% of Intrinsic Value 212.06%

NetApp Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.67 in 2015 to an estimated $2.02 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 11.42% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into NetApp Inc. revealed the company was trading above its Graham Number of $26.89. The company pays a dividend of $0.8 per share, for a yield of 1.3% Its PEmg (price over earnings per share – ModernGraham) was 31.33, which was above the industry average of 29.46. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-5.87.

NetApp Inc. receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$5.87
Graham Number $26.89
PEmg 31.33
Current Ratio 1.65
PB Ratio 10.92
Current Dividend $0.80
Dividend Yield 1.26%
Number of Consecutive Years of Dividend Growth 5

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2018
Total Current Assets $5,471,000,000
Total Current Liabilities $3,310,000,000
Long-Term Debt $1,144,000,000
Total Assets $8,551,000,000
Intangible Assets $1,811,000,000
Total Liabilities $7,021,000,000
Shares Outstanding (Diluted Average) 264,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.09
Apr2018 $0.28
Apr2017 $1.81
Apr2016 $0.77
Apr2015 $1.75
Apr2014 $1.83
Apr2013 $1.37
Apr2012 $1.58
Apr2011 $1.71
Apr2010 $1.13
Apr2009 $0.19
Apr2008 $0.86
Apr2007 $0.77
Apr2006 $0.69
Apr2005 $0.59
Apr2004 $0.42
Apr2003 $0.22
Apr2002 $0.01
Apr2001 $0.21
Apr2000 $0.21
Apr1999 $0.11

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.02
Apr2018 $1.09
Apr2017 $1.49
Apr2016 $1.38
Apr2015 $1.67
Apr2014 $1.59
Apr2013 $1.38
Apr2012 $1.29
Apr2011 $1.08
Apr2010 $0.75
Apr2009 $0.58
Apr2008 $0.74
Apr2007 $0.63
Apr2006 $0.50
Apr2005 $0.37
Apr2004 $0.24
Apr2003 $0.15

Recommended Reading:

Other ModernGraham posts about the company

NetApp Inc Valuation – April 2018 $NTAP
NetApp Inc Valuation – August 2016 $NTAP
NetApp Inc Valuation – March 2016 $NTAP
10 Best Stocks For Value Investors This Week – 9/26/15
NetApp Inc. Analysis – September 2015 Update $NTAP

Other ModernGraham posts about related companies

Microchip Technology Inc Valuation – February 2019 $MCHP
Broadcom Inc Valuation – February 2019 $AVGO
KLA-Tencor Corp Valuation – January 2019 $KLAC
TE Connectivity Ltd Valuation – January 2019 $TEL
NVIDIA Corp Valuation – January 2019 $NVDA
Seagate Technology PLC Valuation – January 2019 $STX
Corning Inc Valuation – January 2019 $GLW
HP Inc Valuation – December 2018 $HPQ
Intel Corp Valuation – November 2018 $INTC
Apple Inc Valuation – November 2018 $AAPL

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Applied Materials Inc Valuation – February 2019 $AMAT

Company Profile (excerpt from Reuters): Applied Materials, Inc. (Applied), incorporated on March 18, 1987, provides manufacturing equipment, services and software to the global semiconductor, display and related industries. The Company’s segments are Semiconductor Systems; Applied Global Services; Display and Adjacent Markets, and Corporate and Other. The Semiconductor Systems segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging and ion implantation. Its Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation software for semiconductor, display and solar products. The Display and Adjacent Markets segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), upgrades and roll-to-roll Web coating systems and other display technologies for televisions, personal computers, smart phones and other consumer-oriented devices. The Corporate and Other segment includes revenues from products, as well as costs of products sold for fabricating solar photovoltaic cells and modules, and certain operating expenses.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of AMAT – February 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $37,944,390,515 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.64 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 306.70% Pass
6. Moderate PEmg Ratio PEmg < 20 14.85 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.74 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.64 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.79 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.68
MG Growth Estimate 15.00%
MG Value $103.13
Opinion Undervalued
MG Grade B
MG Value based on 3% Growth $38.84
MG Value based on 0% Growth $22.77
Market Implied Growth Rate 3.18%
Current Price $39.78
% of Intrinsic Value 38.57%

Applied Materials, Inc. qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the high PB ratio. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.76 in 2015 to an estimated $2.68 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.18% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Applied Materials, Inc. revealed the company was trading above its Graham Number of $20.6. The company pays a dividend of $0.6 per share, for a yield of 1.5% Its PEmg (price over earnings per share – ModernGraham) was 14.85, which was below the industry average of 29.46, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-0.19.

Applied Materials, Inc. performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$0.19
Graham Number $20.60
PEmg 14.85
Current Ratio 2.64
PB Ratio 5.74
Current Dividend $0.60
Dividend Yield 1.51%
Number of Consecutive Years of Dividend Growth 1

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2018
Total Current Assets $10,747,000,000
Total Current Liabilities $4,068,000,000
Long-Term Debt $5,309,000,000
Total Assets $17,773,000,000
Intangible Assets $3,581,000,000
Total Liabilities $10,934,000,000
Shares Outstanding (Diluted Average) 987,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.71
Oct2018 $3.23
Oct2017 $3.17
Oct2016 $1.54
Oct2015 $1.12
Oct2014 $0.87
Oct2013 $0.21
Oct2012 $0.09
Oct2011 $1.45
Oct2010 $0.70
Oct2009 -$0.23
Oct2008 $0.70
Oct2007 $1.20
Oct2006 $0.97
Oct2005 $0.73
Oct2004 $0.78
Oct2003 -$0.09
Oct2002 $0.16
Oct2001 $0.30
Oct2000 $1.20
Oct1999 $0.46

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.68
Oct2018 $2.44
Oct2017 $1.82
Oct2016 $1.02
Oct2015 $0.76
Oct2014 $0.60
Oct2013 $0.46
Oct2012 $0.57
Oct2011 $0.80
Oct2010 $0.54
Oct2009 $0.53
Oct2008 $0.90
Oct2007 $0.90
Oct2006 $0.67
Oct2005 $0.47
Oct2004 $0.39
Oct2003 $0.26

Recommended Reading:

Other ModernGraham posts about the company

5 Companies for Enterprising Investors Near 52 Week Lows – September 2018
Applied Materials Inc Valuation – April 2018 $AMAT
7 Best Undervalued Stocks of the Week – 9/3/16
Applied Materials Inc Valuation – August 2016 $AMAT
Applied Materials Inc Valuation – February 2016 $AMAT

Other ModernGraham posts about related companies

KLA-Tencor Corp Valuation – January 2019 $KLAC
TE Connectivity Ltd Valuation – January 2019 $TEL
NVIDIA Corp Valuation – January 2019 $NVDA
Seagate Technology PLC Valuation – January 2019 $STX
Corning Inc Valuation – January 2019 $GLW
HP Inc Valuation – December 2018 $HPQ
Intel Corp Valuation – November 2018 $INTC
Apple Inc Valuation – November 2018 $AAPL
Littelfuse Inc Valuation – September 2018 $LFUS
CTS Corporation Valuation – August 2018 $CTS

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Microchip Technology Inc Valuation – February 2019 $MCHP

Company Profile (excerpt from Reuters): Microchip Technology Incorporated, incorporated on February 14, 1989, is engaged in developing, manufacturing and selling specialized semiconductor products used by its customers for a range of embedded control applications. The Company operates through two segments: semiconductor products and technology licensing. In the semiconductor products segment, the Company designs, develops, manufactures and markets microcontrollers, development tools and analog, interface, mixed signal and timing products. Its functional activities include sales, marketing, manufacturing, information technology, human resources, legal and finance.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of MCHP – February 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $19,559,376,278 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.04 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 3.23% Fail
6. Moderate PEmg Ratio PEmg < 20 44.65 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.03 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.04 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 108.41 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $1.85
MG Growth Estimate 3.24%
MG Value $27.76
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $26.85
MG Value based on 0% Growth $15.74
Market Implied Growth Rate 18.08%
Current Price $82.70
% of Intrinsic Value 297.92%

Microchip Technology Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.52 in 2015 to an estimated $1.85 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 18.08% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Microchip Technology Inc. revealed the company was trading above its Graham Number of $32.58. The company pays a dividend of $1.45 per share, for a yield of 1.8% Its PEmg (price over earnings per share – ModernGraham) was 44.65, which was above the industry average of 29.46. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-44.96.

Microchip Technology Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$44.96
Graham Number $32.58
PEmg 44.65
Current Ratio 1.04
PB Ratio 4.03
Current Dividend $1.45
Dividend Yield 1.75%
Number of Consecutive Years of Dividend Growth 17

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $2,176,200,000
Total Current Liabilities $2,088,100,000
Long-Term Debt $9,551,100,000
Total Assets $18,667,100,000
Intangible Assets $13,613,400,000
Total Liabilities $13,496,900,000
Shares Outstanding (Diluted Average) 251,800,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.38
Mar2018 $1.03
Mar2017 $0.71
Mar2016 $1.49
Mar2015 $1.65
Mar2014 $1.82
Mar2013 $0.62
Mar2012 $1.65
Mar2011 $2.15
Mar2010 $1.16
Mar2009 $1.31
Mar2008 $1.40
Mar2007 $1.62
Mar2006 $1.13
Mar2005 $1.01
Mar2004 $0.65
Mar2003 $0.42
Mar2002 $0.45
Mar2001 $0.70
Mar2000 $0.59
Mar1999 $0.24

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.85
Mar2018 $1.17
Mar2017 $1.25
Mar2016 $1.49
Mar2015 $1.52
Mar2014 $1.47
Mar2013 $1.32
Mar2012 $1.62
Mar2011 $1.58
Mar2010 $1.31
Mar2009 $1.35
Mar2008 $1.30
Mar2007 $1.16
Mar2006 $0.86
Mar2005 $0.70
Mar2004 $0.55
Mar2003 $0.49

Recommended Reading:

Other ModernGraham posts about the company

Microchip Technology Inc Valuation – April 2018 $MCHP
Microchip Technology Inc Valuation – July 2016 $MCHP
Microchip Technology Inc Valuation – January 2016 Update $MCHP
Microchip Technology Inc. Analysis – September 2015 Update $MCHP
Microchip Technology Stock Valuation – May 2015 Quarterly Update $MCHP

Other ModernGraham posts about related companies

KLA-Tencor Corp Valuation – January 2019 $KLAC
TE Connectivity Ltd Valuation – January 2019 $TEL
NVIDIA Corp Valuation – January 2019 $NVDA
Seagate Technology PLC Valuation – January 2019 $STX
Corning Inc Valuation – January 2019 $GLW
HP Inc Valuation – December 2018 $HPQ
Intel Corp Valuation – November 2018 $INTC
Apple Inc Valuation – November 2018 $AAPL
Littelfuse Inc Valuation – September 2018 $LFUS
CTS Corporation Valuation – August 2018 $CTS

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Broadcom Inc Valuation – February 2019 $AVGO

Company Profile (excerpt from Reuters): Broadcom Inc., formerly Broadcom Limited, incorporated on March 3, 2015, is a designer, developer and global supplier of a range of semiconductor devices with a focus on digital and mixed signal complementary metal oxide semiconductor (CMOS)-based devices and analog III-V based products. The Company operates through four segments: Wired Infrastructure, Wireless Communications, Enterprise Storage and Industrial & Other. It offers a range of products that are used in end-products, such as enterprise and data center networking, home connectivity, set-top boxes (STBs), broadband access, telecommunication equipment, smartphones, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Its product portfolio ranges from discrete devices to complex sub-systems that include multiple device types, and also includes firmware for interfacing between analog and digital systems. Its products include mechanical hardware that interfaces with optoelectronic or capacitive sensors.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of AVGO – February 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $108,783,876,350 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.90 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 771.13% Pass
6. Moderate PEmg Ratio PEmg < 20 17.76 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.26 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.90 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.58 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $15.04
MG Growth Estimate 15.00%
MG Value $579.17
Opinion Undervalued
MG Grade C
MG Value based on 3% Growth $218.13
MG Value based on 0% Growth $127.87
Market Implied Growth Rate 4.63%
Current Price $267.15
% of Intrinsic Value 46.13%

Broadcom Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history, and the high PB ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.76 in 2015 to an estimated $15.04 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.63% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Broadcom Inc revealed the company was trading above its Graham Number of $174.29. The company pays a dividend of $7 per share, for a yield of 2.6%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 17.76, which was below the industry average of 29.46, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-33.79.

Broadcom Inc receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$33.79
Graham Number $174.29
PEmg 17.76
Current Ratio 3.90
PB Ratio 4.26
Current Dividend $7.00
Dividend Yield 2.62%
Number of Consecutive Years of Dividend Growth 8

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2018
Total Current Assets $9,107,000,000
Total Current Liabilities $2,338,000,000
Long-Term Debt $17,493,000,000
Total Assets $50,124,000,000
Intangible Assets $37,675,000,000
Total Liabilities $23,467,000,000
Shares Outstanding (Diluted Average) 425,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $20.94
Oct2018 $28.44
Oct2017 $4.02
Oct2016 -$4.86
Oct2015 $4.85
Oct2014 $0.99
Oct2013 $2.19
Oct2012 $2.25
Oct2011 $2.19
Oct2010 $1.69
Oct2009 -$0.20
Oct2008 $0.38
Oct2007 -$0.74

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $15.04
Oct2018 $10.29
Oct2017 $1.29
Oct2016 $0.31
Oct2015 $2.76
Oct2014 $1.77
Oct2013 $1.98
Oct2012 $1.67
Oct2011 $1.14
Oct2010 $0.49
Oct2009 -$0.11
Oct2008 -$0.07
Oct2007 -$0.25

Recommended Reading:

Other ModernGraham posts about the company

Broadcom Inc Valuation – April 2018 $AVGO
Broadcom Limited Valuation – July 2016 $AVGO
19 Best Stocks For Value Investors This Week – 1/9/16
Avago Technologies Ltd Valuation – January 2016 Update $AVGO
The Best Stocks of the IT Hardware Industry – September 2015

Other ModernGraham posts about related companies

KLA-Tencor Corp Valuation – January 2019 $KLAC
TE Connectivity Ltd Valuation – January 2019 $TEL
NVIDIA Corp Valuation – January 2019 $NVDA
Seagate Technology PLC Valuation – January 2019 $STX
Corning Inc Valuation – January 2019 $GLW
HP Inc Valuation – December 2018 $HPQ
Intel Corp Valuation – November 2018 $INTC
Apple Inc Valuation – November 2018 $AAPL
Littelfuse Inc Valuation – September 2018 $LFUS
CTS Corporation Valuation – August 2018 $CTS

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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