The prediction in Barron’s of a 30% rise in Intel shares by the end of 2015 has unsurprisingly gained much media attention. The argument is that the current EPS Momentum will be maintained, pushing forward estimates through $3 per share, which at the prevailing 16x, would merit a 30% rise from the current share price. An investor might take issue with a high forward multiple being sustained, even after a period of unusual EPS growth has been delivered, and we may use OTAS to assess how likely this will be.
Current estimates for EPS at Intel for years ending 2014 through 2016 are $2.24, $2.38 and $2.66. One month EPS Momentum in 12 months forward estimates is 0.9%, which compares favorably with the NASDAQ average of -0.1% and the semi sector of -0.4%. Year three estimates, for 2016, have already experienced larger upgrades than for the preceding two years, indicating that some of the potential sources of good news in the Barron’s article may have been taken on board by analysts.
Intel’s share price has tracked the trend in 12 months forward EPS closely over the past two years. Over the longer term, there are considerable periods when this relationship breaks down. The share price is temporarily above the trend in earnings.
The Intel forward PE of 15.1x is only marginally above average over the past 8¾ years, although at just over parity to the semiconductor and semi equipment sector in North America, is elevated compared with the 10% discount that Intel has averaged. Furthermore, if we eliminate the elevated PE during the financial crisis and look back five years, Intel is as highly valued as it ever was. On an EV/EBITDA basis, which for many is a preferred way of assessing the sector, Intel trades at 6.8x, which is at the very high end of valuation over the past two years and only marginally below the top end of the average range over the past 8 years. EBITDA margins are forecast to peak in 2014, which explains the peak EPS growth in the current year.
Thus while maintaining 16x forward estimates is conceivable for Intel, given the highest multiple paid for a stock is typically at the peak of earnings growth, this suggests that it may be difficult to sustain so high a rating as EPS growth slows. Another constraint on performance may be the rating relative to peers, which is already above historic levels. The largest companies may trade at discounts to their sector, because size alone makes it difficult to match the growth of more agile peers.
Barron’s tells us that Intel shares are halfway to the doubling it predicted in June of last year. Since then the sector has been on a rip, outperforming the market by over 20% points, while Intel has merely kept pace with peers. The re-rating of Intel shares over that period relative to the sector is because its EPS has grown more slowly, suggesting investors are discounting future growth already. This may mean that the easier half of Barron’s prediction has already come to pass.
Those who are tempted to take the journal’s advice and stay invested for another year would appear to be assuming that the most bullish industry estimates will become the consensus, and that the outperformance of the sector as a whole will continue. For those that expect out performance from semis, the option market predicts the widest range of three month share price to be at solar plays Trina, JA Solar, SunEdison, SunPower and First Solar. Other share prices with more potential upside than Intel according to option investors include Advanced Micro Devices, Skyworks and Micron Technology.