Intel (NASDAQ:INTC) is a $236 billion leading manufacturer of integrated circuits for personal computers. INTC stock has risen from $46 at Christmas 2020 to around $60 today.
After this price run-up, is Intel a buy, a sell or a hold?
The answer lies in valuation: Is INTC stock cheap or expensive relative to the company’s history?
Recent Company Headlines Offer Mixed News
Intel has enjoyed a coronavirus pandemic related sales boost, yet company news has been mixed the past several months. On a positive note, in January 2021, the company reported an impressive fourth-quarter earnings beat. Contrast that with news last week where a jury in Texas ordered Intel to pay $2.2 billion in damages after losing a patent trial.
The bigger picture is that Intel has made massive investments and wise strategic choices. As the most recent company 10-k notes:
“The world is changing and driving the need for exponentially more computing. First we experienced the PC era, followed by the mobile and cloud era. We are now entering the era of distributed intelligence, where computing is pervasive and so many things in our lives — our homes, our cars, our hospitals, and our cities — now function like computers. In this world of distributed intelligence, our three fastest growing opportunities are AI, 5G network transformation, and the intelligent and autonomous edge.”
Is INTC Stock Cheap or Expensive Right Now?
Money is made or lost the day we buy a stock — we just don’t know it yet. For instance, outsized returns are possible if we buy when shares are cheap and look out below if we buy when shares are wildly expensive. Sometimes shares are priced at the company’s normal valuation.
Considering this idea, how might we decide if Intel shares are cheap or expensive right now?
One method I have found profitable is to compare the company’s forward price-to-earnings ratio with it’s own historical normal P/E. From there, apply that normal P/E multiple to expected earnings per share to determine what shares are typically worth.
Today Intel is available for 11.6x earnings. In other words, about it’s own “normal.”
Apply that 11.6x to earnings per share of $5.30 and a reasonable price target is $61. Intel stock is running today about $60.
More interesting to note, over the past 10 years there are peaks and valleys when the stock sold off or bottomed out before a nice run up.
For example, INTC stock sold off generally when the price rose to 12x to 15x earnings, and it was time to buy when shares were 7x to 9x earnings.
How to Make Money on Intel
First, wait until a price pullback to around 9x to 10x earnings. History tells us with earnings of $5.30, we might wait to buy if the price drops to $47 – $53 over the coming months to create a bit of a margin of safety. Intel was available at those prices several times as recently as 2020.
Second, if you already own shares, consider patiently holding. Shares are just 11x earnings right now, and past selling peaks were as high as 15x. There is room for this stock to rise, and you collect a 2.3% dividend along the way.
Third, if you are willing to possibly part with your shares, options-savvy investors could sell a call on 100-lot shares owned at a high point valuation price. Sellers of call options receive premium in exchange for the obligation to sell. For example, selling a Jan 2022 call at the $75 strike price fetches around $3.60 right now.
Imagine that: you could sell a call today and receive $360 per contract as immediate cash to use. Then hold the shares. If the price rises above $75 at contract expiration, then your shares will be called away at $75 per share. But remember that you have already received $3.60 per share as premium, so your net selling price would be $78.60.
If the share price is below $75 at contract expiration, simply keep the premium and the shares. The net effect is to lower your cost basis by $3.60 per share.
Your Take-Away
Intel stock has been a roll lately. This high-quality company is selling nearly equal to valuation. To summarize several ways to make money, current Intel owners could patiently hold to enjoy further growth and collect dividends, or options investors could consider selling calls to juice returns a bit.
As of this writing, Doug Morse did not have (either directly or indirectly) any positions in the securities mentioned in this article.
