Berkshire's brief ownership of Intel and apparently well timed exit along with Intel's recent appearance on the 52 week low list prompted a brief look at Value Line. I know that there has been some discussion of Intel here in the past so I thought I would post a few observations.First, it seems clear that the stock is quite cheap based on trailing earnings as well as "consensus" estimates and the company now yields in excess of 4%. However, much of the improvement in results seems to be due to margin expansion - with operating margin increasing from a recession low of 29.8% in 2009 to 42.4% in 2011. Margins were somewhat higher in 2003 and 2004 but the company seems to be approaching peak margins from past cycles. The valuation may indicate that the market agrees, but some analysts, such as Value Line, forecast continuing expansion in operating margins to 50% by 2015-2017 along with net margin of 24.5% ... which seems on the aggressive side. The average operating margin based on value line's data over the past ten years is 38.7% and average net margin is 18.6% over the same timeframe. If we take Value Line's 2015-17 sales estimate of $70 billion at a midpoint of 2016 and apply the average net margin of 18.6%, we would get $13 billion of net income, or around $2.60 per share. Value Line's estimate is $3.40 per share due to the more aggressive margin assumptions. If we use their 12x P/E but against the more conservative $2.60 EPS, that gets to ~$31/share by around 2016 ... four years from now, plus shareholders should collect between $3.50-$4.00 in dividends over that timeframe. That's about a 60% total return or 12.5% annualized over the next four years using what appears to be "normalized" margins BUT also using Value Line's $70 billion sales forecast which I'm not sure is realistic. At first glance, Intel looks like it warrants further work even using "normalized" margins assuming that sales growth expectations hold up. I guess that's the main concern facing the company right now given the issues surrounding the PC market ... If sales are $50 billion in 2016 rather than $70 billion and "normalized" margins prevail, EPS would be around $1.85/share ... and probably would not be assigned a P/E of much more than 10. That would imply near zero returns on the stock from today's price over the next four years.So I think the company warrants further work after a first glance ... It would be quite interesting to hear Combs or Weschler's thoughts on buying and selling Intel. Perhaps they would be willing to talk about it since Berkshire no longer owns the stock. It would be great if Buffett makes Combs and Weschler available at the next shareholder meeting to answer questions from the audience but I doubt that will happen.
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