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This article first appeared on Simply Wall St News .
After a furious run that saw Intel Corporation ( NASDAQ:INTC ) reach over 30% gain year-to-date, the stock has retraced almost all of it, falling back to the important support at US$52.5.
With a P/E ratio of 11.84 and a dividend yield of 2.61%, the stock is now in the value investment territory.
While the market has experienced earnings growth lately, Intel's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E.If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favor.
If you'd like to see what analysts are forecasting in the future, you should check out our free report on Intel .
Intel appears unable to break from the range, stretching back to 2018. With the bottom of the range at US$44 and the top at US$68, this is quite a wide range, with the price currently being at „ no man's land “ in the low 50's.
Does Growth Match The Low P/E?
Intel's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year's earnings, we can see that the company's profits fell to the tune of 18%.Even so, admirably, EPS has lifted 59% in aggregate from three years ago, notwithstanding the last 12 months.Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term earnings growth rates.
Looking ahead now, EPS is anticipated to slump, contracting by 4.2% per annum during the coming three years, according to the analysts following the company.That's not great when the rest of the market is expected to grow by 12% per year.
In light of this, it's understandable that Intel's P/E would sit below most other companies.However, shrinking earnings are unlikely to lead to a stable P/E over the longer term.There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
Lack of Excitement Contributes to Low P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Intel's analyst forecasts revealed that its outlook for shrinking earnings contributes to its low P/E. Shareholders accept the low P/E as they concede future earnings probably won't provide any pleasant surprises.
Intel has been facing a major branding problem as it is no longer seen as an exciting growth stock – those titles currently go to its rivals like AMD or Nvidia. However, the current situation in the semiconductor market that is skewing the power of suppliers pushes it to the spot where it doesn't have to worry about the demand. This situation is likely not going to be resolved before 2023.
Until then, Intel has enough time to reinvent itself. The latest collaboration with TMSC is an important step in that direction, as Intel can leverage the production capabilities to challenge AMD and Nvidia in their dominant segments.
Finally, Intel's free cash flow generation is far ahead of its competitors; however, the attempt to keep the stock up through buybacks has not fared well. Capital investment in 2 new factories in Arizona , as well as a US$200b plan for Intel Foundry Services, looks to be a step in the right direction, as the current semiconductor shortage showed that the market is ripe for a change.
You need to note risks; for example - Intel has 2 warning signs (and 1 which makes us uncomfortable) we think you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.