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Newsletter portfolio holding Intel continues to put up strong results, and the market is simply not giving it credit for them.

By Brian Nelson, CFA

We were generally pleased by Intel’s (INTC) second-quarter report, released July 27. In a market environment, where other equities with little-to-no-growth are garnering outsize multiples, Intel registered top-line expansion of 9% on a year-over-year basis in the quarter, while it raised its non-GAAP earnings per share outlook for 2017 by $0.15, to $3.00, implying shares are trading at a very modest ~12 times current-year numbers. We would say Intel’s shares are a bargain in most any market, but especially in this one, where the average S&P 500 company is trading at 17.7 times forward earnings, according to FactSet. If Intel garnered the average forward multiple of the average S&P 500 company, for example, shares would be trading at over $50. From where we stand, there is no good reason why, in this “kind of market,” the company’s equity has not rallied considerably alongside its technology peers.

Q2 was an outstanding quarter with revenue and profits growing double digits over last year,” said Brian Krzanich, Intel CEO. “We also launched new Intel Core, Xeon and memory products that reset the bar for performance leadership, and we’re gaining customer momentum in areas like AI and autonomous driving. With industry-leading products and strong first-half results, we’re on a clear path to another record year. – Intel’s second quarter report

What’s more, it is not as though Intel is a low-quality, cost-cutting “story” either. The technology giant’s second-quarter revenue (excluding Intel Security Group) leapt 14% on a year-over-year basis as it noted “strong performance in client computing (up 12%) and data-centric businesses (up 16%).” Its ‘Internet of Things Group’ revealed revenue expansion of 26% on a year-over-year basis in the quarter, while its ‘Non-Volatile Memory Solutions Group’ showcased top-line growth of nearly 60%.” Sales trends are also coming in better-than-expected, with the company raising its full-year revenue outlook by $1.3 billion, to $61.3 billion. Intel is a free-cash-flow-generating powerhouse, too. In the quarter, cash flow from operations was $4.7 billion and capital spending was $2.8 billion, implying free cash flow generation of $1.9 billion, roughly 50% higher than cash dividends paid in the period.

Frankly, it’s hard not to like Intel’s valuation at current levels, and while we note the entity does have a net debt position after recent dealings and it still has the pending Mobileye (MBLY) outstanding, “Intel Makes Strong Move into Autonomous Driving,” we have only minimal concerns about its balance sheet given strong top-line performance and free-cash-flow generation. From where we stand, the market is simply being unfair when it comes to the pricing of Intel, as even GAAP-based analysis suggests shares are too cheap (2017 GAAP EPS guidance of $2.66 x 17.7 average S&P company market multiple = $47 per share). Our fair value estimate for Intel is conservatively set at $42 per share, with the high end of the range at $50. The company yields 3% at the time of this publishing.

See Intel's stock page: https://www.valuentum.com/search2?searchtext=intc&searchtype=symbol