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Intel Corporation Message Board

  • paul.ottelini paul.ottelini Aug 23, 2014 9:23 AM Flag

    SA article places Intel fair value at over $50 a share.

    Fair value

    There are several possible ways to calculate the fair or intrinsic value of a company's shares, I will use Graham's revised formula from 1974 as well as the DCF (Discounted Cash Flow) method.

    Graham's formula for calculating the intrinsic value is:

    V = EPS * (8.5+2*G)*4.4/Y


    V = Intrinsic Value

    EPS = Earnings per Share of the last twelve months

    G = Estimated EPS growth rate over the next five years

    Y = Yield on AAA corporate bonds

    By applying Intel's numbers to this equation we get a value of

    $2.02*(8.5+2*8.83)*4.4/4.2 = $55.36.

    The DCF method sums up the value of a company's free cash flows from now until infinity (but discounts them to present value). I make the assumption that FCF per share and earnings per share are equal over a long time since it's much easier to get EPS numbers.

    If we use the current EPS of 2.02 and the estimated growth rate of 8.83% over the next five years and an EPS growth rate of 5% after that (which in my opinion is rather conservative, since EPS should increase due to increase in volume, increase in prize per unit sold (inflation) as well as share buybacks), and calculate with a discount factor of 10% (meaning we are aiming for a 10% capital return per year), the fair value is $49.99.

    A slightly less conservative assumption of an EPS growth rate of 5.5% from year 6 on would equal a fair value of $54.67, very consistent with Graham's formula.

    Both approaches come up with a fair value clearly above current share prizes (around 60%), so, even if being conservative and applying a margin of safety of 20-30%, it looks like it's still a good idea to buy Intel's shares.

    Sentiment: Strong Buy

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