Stock Market Direction by Steve Zito Intel Review Page
Intel Review written by Steve Zito. THIS ANALYSIS WRITTEN AND POSTED APRIL 26, 2000.
Despite that, all of the conclusions have remained amazingly valid through May 2003.
This analysis is better than Wall Street brokerage hype when Intel was $144 (split $72).

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INTEL's FAIR VALUE PRICE
see below for valuation model calculated APRIL 26, 2000
PLEASE NOTE THAT INTEL's PRICE SPLIT JULY 31, 2000,
SPLIT PRICE BELOW IS SHOWN IN PARENTHESES ($XX.xx)

Intel 03 month price change---33%, outperformed 91% of all stocks
Intel 06 month price change---62%, outperformed 85% of all stocks
Intel 12 month price change--105%, outperformed 88% of all stocks

How to value Intel Corporation, leader in microprocessors? Read on!

First I estimate future earnings per share for 2000 and 2001. Then I multiply by a price-to-earnings ratio, known as a P/E. This produces a stock price which becomes a maximum target value. Companies with consistent earnings and strong growth, such as Intel, usually command high P/E's (for instance, IBM has a P/E of 28 compared to Intel's P/E of 54). If earnings and growth increase over time, then P/E's increase, and stock prices rise accordingly.
If growth slows due to the maturation of the firm, then P/E's will not increase.
I can also apply the stock's P/E to stock brokerage analysts' mean estimates for the next year's earnings to compare the widely published price targets stock brokerage analysts use for public recommendations. Some background is in order.

In the past ten years, net annual revenues for Intel have grown from
$3.9 billion to $29.4 billion.
In the past ten years, earnings per share (stock split adjusted in parentheses) have grown from
$0.20 ($0.10) per share to $2.11 ($1.06) per share.
The stock price has risen from $2.46 ($1.23) in 1990 to $125 ($62.5) now in April 2000.
Return on average stockholder's equity has risen from 21.2% in 1990 to 26.2% in 1999. In 1997, it peaked at 38.4%, after averaging 34% during 1993-1997, at the same time, Intel started to reduce capital spending from $4.5 billion in 1997 to $3.4 billion in 1999. Return on average stockholder's equity fell to 26.2% in 1999, but for this year 2000, the same return is already an excessive 52% in less than four months.

Using the current available P/E for Intel of 54, and the mean estimate for earnings for fiscal year 2000, stock brokerage analysts have calculated a target price for Intel of $178 ($89) in 2000, and $208 ($104) in 2001. Here is how it is done.

Intel current price April 26, 2000: $125 ($62.5)
Intel -low 2000 earnings estimate: $2.44 ($1.22)
Intel high 2000 earnings estimate: $3.25 ($1.63)

VALUATION MODEL
Intel current P/E (price to earnings) ratio: 54
Intel average earnings estimate fiscal 2000: $3.01 ($ 1.50)
P/E multiplied by -ave. earnings estimate: $162.54 ($81.27)
Intel average earnings estimate fiscal 2001: $3.51 ($ 1.76)
P/E multiplied by -ave. earnings estimate: $189.54 ($94.77)

adjusting for 10% EPS surprise latest Quarter

earnings surprise in latest quarterly report: 10%
Intel average earnings estimate -w/surprise: $3.30 ($ 1.65)
P/E multiplied by max. earnings est. 2000: $178.20 ($89.10)
Intel average earnings estimate -w/surprise: $3.86 ($ 1.93)
P/E multiplied by max. earnings est. 2001: $208.44($104.22)

Some of the more bullish brokerage gurus use
the P/E for Intel's industry- electronics.

VALUATION MODEL
Electronics industry's current multiple (P/E): 93
Intel average earnings estimate fiscal 2000: $3.01 ($ 1.50)
P/E multiplied by -ave. earnings estimate: $279.93($139.97)
Intel average earnings estimate fiscal 2001: $3.51 ($ 1.76)
P/E multiplied by -ave. earnings estimate: $326.43($163.22)

Obviously, if Intel is going to $279 ($139) by the end of the year 2000, and $326 ($163) by the end of the year 2001, investors should borrow to the hilt, sell the house, and buy Intel. We would all get rich if this valuation model ever worked. Unfortunately, this valuation model is part of the fantasy world of a select group of brokerage house analysts who may be "hot" this year with their stock picks, but in the long run, these gurus will fade like yesterday's advance/decline line. For example, when a "guru" uses the average P/E for the electronics industry, that proves that Intel is "part of that industry", not that Intel should be valued at the average P/E of that industry. Consider that in 1990, Intel had a price of $2.46 ($1.23), and a P/E of 12.3 on the $0.20 ($0.10) of annual earnings. Over the period 1990 to 1998, Intel NEVER achieved a P/E over 34. It makes more sense to use Intel's average P/E over the past ten years to determine the stock price, than to use the electronics industry P/E.

Using the high range of the ten-year average P/E for Intel: 26

VALUATION MODEL
Intel high range ten-year average P/E ratio: 26
Intel average earnings estimate fiscal 2000: $3.01 ($ 1.50)
P/E multiplied by --ave. earnings estimate: $78.26 ($39.13)
Intel average earnings estimate fiscal 2001: $3.51 ($ 1.76)
P/E multiplied by --ave. earnings estimate: $91.26 ($45.63)

My analysis shows that a "fair value" for Intel is $39, and $45 next year. Obviously this stock is 60% overvalued! Analysts depend on a paycheck from a brokerage. They cannot tell you what I am telling you, they have to push the stocks in which their firms make a market. They have a vested interest. What I am telling you is that you should listen to the data and not the hype, and determine for yourself what Intel is worth.

Update (shown below) to my April 26, 2000 article on Intel (shown above).
All prices for Intel shown are pre-split (after-split prices shown in parentheses).

Here are listings for Intel analysts (April 2000). Not one recommended selling Intel,
even though Intel had doubled to $144 in 6 months from a $72 ($36) low in Nov. 1999.
Robertson Stephens computer analyst (now senior technology analyst at Lehman Brothers)
Dan Niles had a ridiculous target price of $175 ($87.50) which he touted on CNBC (TV)
repeatedly March to June 2000. The jerk was laughing about it on CNBC Sept. 21, 2001.

Analysts Recommendation in April 2000
Strong Buy--- 22
Moderate Buy- 11
Hold---------- 4
Moderate Sell- 0
Strong Sell--- 1 (only me!)

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