Intel (NASDAQ:INTC) stock is up over 52% since its lows in early June but the stock is still cheap at just 13 times earnings and a 2% dividend yield.

Moreover, Intel reported fantastic results for its fourth-quarter revenue and earnings, with earnings per share up 19% on a non-GAAP basis and revenue rose 8%.

Buyback Effect

In fact, net income rose just 13% during the fourth quarter. The reason why earnings per share rose faster than net income was solely due to the large number of shares that Intel repurchased.

Intel bought so many shares during 2019 that the number outstanding fell 5% throughout the year. Moreover, over the past five years, Intel repurchased and reduced its share count by almost 9.6%.

The chip maker could do this because free cash flow is so strong. Intel generated $16.9 billion in free cash flow in 2019, up $2.6 billion from 2018, or over 18.1% in just one year.

Moreover, Intel’s $16.9 billion of FCF represents 6% of its $282.4 billion in market value. This is a huge value metric for Intel stock. It is likely a major reason why INTC rose so much from its lows during 2019.

Strong PC and Server Demand

Intel is facing strong PC and server demand in its core businesses. In fact, Cowen raised its target price for Intel stock to $64 per share based on this strong demand.

In its Q4 earnings release, Intel indicated that free cash flow would likely stay at around $16.5 billion for the full year. This is just $700 million below where it was for 2019. Intel has a history of beating its guidance, so this is likely to be conservative.

Barron’s recently reported that Deutsche Bank’s analyst believes Intel could outperform its forecast for this year. Management’s guidance for 2020 revenue is for $73.5 billion and adjusted earnings per share of $5.00. Wall Street had been forecasting sales of $72.4 billion and EPS of $4.66.

Deutsche’s Ross Seymore believes management’s guidance may be too conservative, writing that Intel stock is offering “a positive risk/reward within an otherwise expensive semiconductor sector.”

Competitive Pressures

The competition with Advanced Micro Devices (NASDAQ:AMD) has been getting intense after three years of AMD taking away market share from Intel.

Intel CEO Bob Swan said that competition in the server market is especially intense and Intel plans on “vigorously” protecting its market share.

To be sure, Intel has been slow in rolling out its next-generation 10-nanometer processors. Supply chain problems have held it back. This has given AMD a chance to pick up market share with consumer device makers as well as data center clients.

Some analysts are now predicting that AMD could raise its market share in data center processors to 15% this year from 5% last year. Prior to this it only had a 3% market share.

Swan, who has been Intel’s CEO for about a year now, has his work cut out for him. On his earnings conference call last quarter he pointed out that more than 50% of Intel’s revenues now come from its “data-centric collection of businesses.” He plans on continuing this growth to take advantage of the “data revolution.”

Valuation is Cheap

If Intel does make $5 per share in EPS this year, its price-to-earnings ratio will be just over 13x earnings. That is very cheap, as Deutsche Bank pointed out.

Moreover, Intel just announced a 5% increase in its annual dividend per share. In the last five years, Intel has hiked its dividend to just about 7% per year.

Here is what that means if we project this forward: If the average dividend increase is 7% for the next three years the annual dividend by year four will be $1.62 per share.

So if you take today’s dividend yield of 2% and divide it into $1.62 per share, the target price will be $81 per share. Using a 3% net present value discount rate the present value is $74.12 per share.

That means that Intel is worth 19.4% more than today’s price, just assuming today’s trends continue. For example, it assumes that the growth in FCF continues to support the dividend hike and share reduction trends.

What Should Investors Do With Intel Stock?

Intel reported earnings on Jan. 23 and also increased its dividend. I don’t expect further official earnings information for another three months or so.

Intel stock is likely to do better throughout the year as it becomes clear that growth will continue like it did last year. Nevertheless, investors can assume that free cash flow will be plenty sufficient for Intel to both pay its higher dividend and reduce its shares outstanding.

Intel stock looks like a good bargain at this cheap valuation, its growth prospects and the strong free cash flow growth that can be expected. I have shown that, based on these prospects, INTC stock is worth $74.12 per share, or at least 19.4% more than its present price.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.