Novice Investing - Un-Intel-ligent Earning Report

Date: Tuesday 13th 2008f May 2008 07:22:50 AM

Un-Intel-ligent Earning Report - 01/16/2008

By: Novice Investing Staff

Investors brace for another rough session today as Intel Corp. (INTC) posted a 51% jump in profit to 38 cents per share , but missing analysts' estimate of 40 cents per share. Big deal, you said. It is only 2 cents per quarter and 8 cents per year if they keep this rate of achieving analysts' target. But you are missing the point. A lot of expectation had been baked into Intel's share. With expected yearly earning per share of say, $ 1.51 for fiscal year 2008 , Intel is trading at a 13.6 earning multiple (after accounting for cash and long term debt level). This is slightly below fair value for a slow growth company like Intel. However, with this earning miss, Intel shall earn less than $ 1.51 per share of EPS. In addition, Intel is forecasting revenue for the first quarter of 2008 $ 300 Million lower than prior estimate. That will erode earnings further, which is the reason why Intel is down more than 10% before trading session begin.

Further, is this the right way to value Intel? With the cyclical nature of Intel's business, how should we value the company? Our guess is it should trade less than the market. Take a look at the profit trend of Intel for the past several years.

Year	2001	2002	2003	2004	2005	2006
EPS	$ 0.52	$ 0.50	$ 0.96	$ 1.16	$ 1.41	$ 0.90

Meanwhile, 2007 final figure will came in at $ 1.05 per share. If you averaged these seven years worth of data, Intel is earning $ 0.93 per share, which is significantly less than $ 1.51 it is expected to earn in 2008. Currently market is trading at around 15 times earnings. Applying a 8% yield on Intel will give it a fair value at 12.5 times earnings. Therefore, fair value of Intel shares based on its performance for the past six years is roughly $ 14.37 per share.

What would you do as an investor? A few months back, Intel was on a tear, trading at its 52 week high at $ 28 per share. A glance at Intel now reveals that it is actually trading to its 52 week low of $ 18.75 per share. That is

still lower than its expected fair value. We never get to understand the expensive multiple that Intel gets as a cyclical play. However, its only direct competitors to the PC processor market is a much smaller Advanced Micro Devices (AMD) where it is barely surviving. With negative net cash of $ 3.8 Billion, AMD is at a disadvantage during this economic downturn. Therefore, Intel is most likely not traded below $ 14.37 per share for the foreseeable future. Perhaps we would never have a chance of owning Intel since we typically purchase shares at below 50% from fair value for our sample portfolio.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Intel Corp. (INTC) or any other securities.

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