Dividend Investing | Technology

Intel Chip Shortage Continues and Will Persist

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“Intel has admitted it is facing a microchip shortage due to a surprising rally in the personal computer market.” [1]

Intel produces 90% of the world’s personal computer processors. [1]
This is a significant admission.  Global PC demand has been higher than expected of late.  Intel chief (interim) Bob Swan has confirmed this by “…publishing an open letter warning business partners that supply was “tight”. [1]

… and saying:

“The surprising return to PC market growth has put pressure on our factory network … supply is undoubtedly tight, particularly at the entry level of the PC market…” [1]

Experts expect the shortage to linger throughout the year.  Obviously this plays into the retail holiday season at year’s end.

My own take is that Intel will gain in the short term due to price increases and speculators attempting to exploit the shortage; however, supply contracts are often long term in nature to avoid situations like this and Intel will most certainly lose future revenue if they cannot keep up with the pace of demand.  Long term, Intel’s goodwill with down-line manufacturers will most certainly suffer.  I think future supplier contract negotiations will become even more difficult for Intel.  Better forecasting of demand for the products that lie within their wheelhouse should not be a struggle, but seems it has been.

Despite this, I still view Intel stock as undervalued and good buy for my portfolio at current market prices.

Sources:

[1] – https://uk.finance.yahoo.com/news/intel-scrambles-avoid-microchip-shortage-184427951.html

[2] – https://www.telegraph.co.uk/technology/2017/04/12/pc-sales-grow-first-time-five-years/

 

Dividend Investing | Technology

80% Buy Signal for Intel – Door is Open

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Intel is the world’s second largest and second highest valued semiconductor chip maker based on revenue after Samsung [1]
As I track my various dividend holdings, I am always looking for entry points.  Gotta spend that dry-powder every now and then, right?  I use a set of signals to help me decide what fair value for a dividend stock should be.  Intuitively,  if current price is below what I think fair value should be, it’s time to dig deeper.  When looking at Intel (INTC), certain signals suggest it’s time for me to consider buying again.

  • Intel is trading below fair market value.
  • Pro’s: Price, Payout Ratio, Sales Growth, P/E.
  • Con’s: Chowder (Yield + CAGR), EPS

Quick Conclusion

  • INTC
  • Consider Buying: $49.84
  • Fair Value:$52.46
  • Consider Selling: $62.96
  • Current Price: $45.42  <<< Hello!

Different Valuation Methods – Analysis Part 1

Using different data elements and ratios, I calculate or research what a fair price for the stock would be.  I then assign a weighting value to each method and come up with an aggregate fair price.

Dividend Yield Method:

  • Stock Price = Current Dividend / (Current Dividend Yield * (1 + 5-Year Dividend CAGR))
  • $1.20 / (2.6% * (1 + 4.4%)) = $43.72
  • Note: CAGR means Compound Annual Growth Rate.

P/E Method:

  • Stock Price = Future EPS * Current P/E
  • 4.23 * 16.40 = $69.73

PEG Method:

  • Stock Price = Current PEG Ratio * Current P/E
  • 1.20 * 16.40 = $19.68

Gordon Method:

  • Future Dividend Amount / (Historical Rate-of-Return – 5-Year Dividend CAGR)
  • $1.25 / (14% – 4.4%) = $13.01

Change in EPS and P/E Method:

  • (Change in EPS * Change in P/E) + Current Price
  • (1.46 * -6.1) + $45.42 = $36.51

Morningstar’s Fair Value:

  • $65.00
  • If you don’t have a subscription, you can find the value by using the resources of your local public library– many of which provide you with a link after logging in with your library card.

Professional Analyst Price Targets:

Aggregate Fair Value:

  • $52.46
  • This is the final stock price value I use to determine if the price is inline with, above, or below current market price. Instead of an average of all the values above, I just use separate weights for each measure when coming up with a final value.

Quality Signals – Analysis Part 2

Price is a large factor in my buy decision (shown in Part 1 above), but I also look at various other buy signals. I weight each signal, based on my opinion of what is most important to me, and come up with an aggregate buy score (0-100%).  The higher the score, the stronger the buy signal.  Anything above 60% warrants my consideration.

  • Price is at least 5% below fair market value (covered in Part 1 above) : YES
  • Dividend Payout Ratio <= 60 : YES
  • Dividend Yield + 5-Year Dividend CAGR (“Chowder” ratio) >= 12% : NO (it’s 7%)
  • 5-Year EPS CAGR Growth Rate >= 1% : YES (just barely)
  • 5-Year Sales Growth Rate >= 1% : YES
  • P/E <= 20 : YES

I add a weighting I have defined for each of these signals and then transform those binary values (yes or no) into a 0-100% scale.  0% = lowest possible buy signal, 100% = highest possible buy signal.

For INTC, this current comes out to 80%.

Conclusion

My Dividend Investing portfolio is slightly underweight on Technology stocks, so I have been looking to boost that.  Intel is currently trading at what I believe is well below fair market value.  Buy signals give it a score of 80% (indicates positive quality).  Both of these together indicate I should give strong consideration to buying more shares for my portfolio.  Obviously I will need to take into consideration non-financial topics, such as criticism of Intel’s current leadership, chip market saturation (demand issues), etc. (but that’s all for another article).

Article Sources:

[1] Pic: https://en.wikipedia.org/wiki/Intel

[2] https://www.marketwatch.com/investing/stock/intc/