What we call “Old Tech” has been on a tear in 2014.
Has anybody noticed?
Case in point has been Intel Corp. that had a positive transit of EBV+4 last week when the company reported second quarter earnings. All in all (with dividends) Intel is up almost 40% for 2014 and with a positive transit of one of our EBV Lines indicating improving corporate fundamentals and potential share gains in the future.
An additional fundamental positive is our calculation of model price. As you can observe from the model price chart below our calculation of fair market value for Intel is $46.25. This implies another 35% gain potential for investors sometime in the future.
Model Price Chart that can be found on our Facebook app ‘Model Price’
Additional Model Price Analysis
I was curious about Intel. Maybe something is going on here that can make me a few dollars – more than I have already made from EBV+3. I seem to recall, from the daily white noise of the business press, Intel getting into the chip (semiconductor) business for mobile phones, albeit very late in the game, combined with the fact the company has a new CEO. CEO’s are very important to the long run (secular) gains of any public company. Ask an investor in Apple since Steve Jobs returned to Apple in 1996 or long term investors in General Electric when Jack Welsh was running the company back in 1980’s and 90’s. CEOs make a big difference in rates of returns on your investments and if you can identify one early enough, invest, sit back and relax and you can enjoy a great financial ride into retirement.
Good CEOs leave fingerprints. Financial fingerprints. Fingerprints you can identify and see concurrently on a quarterly earnings report. Yes, we can all spot a special CEO after the fact. After this CEO added tens (and hundreds) of billions of market capitalization to the company that she runs. That’s easy.
In the context of investing; history is nice, but it’s the future I want to know.
First, I have a quick look at our long-term model price chart of Intel going back to 2007 of the Model Price Facebook app.
Model Price Chart that can be found on our Facebook app ‘Model Price’
Hmm… you can observe that Intel’s stock price had a positive transit of EBV+4 on two other occasions before last week. The first positive transit occurred in 2010 and the other obviously at the beginning of 2012. Interestingly both times the stock price peaked in price at mid-year before not only falling in price but also negatively transited back down through the same EBV+4. Yikes! Check your calendar; yes, it’s mid-year 2014!
“OK, strike one!” I say to myself.
But I’m still intrigued.
So I call up my Model Price database. My first analysis is looking at the long-term history of earnings of Intel and what is going on concurrently with Theoretical Earnings (TE). Theoretical Earnings is a financial concept particular to MPT. (For a fuller discussion of TE see ‘Key Concepts’ above.)
A few observables from the above chart
1. Intel’s earnings over the last twenty years have been more cyclical than I remember them.
2. Intel’s earnings ‘crashed’ during the financial crises of 2008 however rebounded smartly to record highs in 2012.
3. Looks like something happened in 2013 that caused a dip in earnings. What happened? I haven’t a clue nor do I care to find out. But a year after this dip, Intel’s earnings consolidated around the $2 a share level and look like they are returning to record highs (maybe).
4. Theoretical Earnings (TE) have been on a steady increase since 1995 with a dip starting in 2011 and 2012. I’m guessing here but this is probably because of share buybacks on behalf of the company. (Again I do not care why the TE is falling just that a falling TE and increasing earnings is a positive for the valuation of the company.)
We can look at this above chart differently.
I like computing a ratio between the two data series displayed above and charting the series over long periods of time. What I’m getting at with this analysis is how profitable Intel is relative to its’ own calculation of benchmarked earnings or TE. Or if you prefer the earnings of Intel relative to the size of the company’s balance sheet – a balance sheet the company’s CEO can control.
You can observe back in 1997-98 Intel was earning 9 times its TE. And having peaked at this level this ratio has fallen to a low and stable level at 2 times, plus or minus, over the last 12 years.
What does this mean?
Relative to the size of the balance sheet Intel’s earnings are quite unimpressive, somewhat stable (ignoring 2008), and a country mile from the robust years of 1997-98.
The next MPT variable I call up in our Model Price database is convexity. Again you can find a definition of convexity under our ‘Key Concepts’ tab or better still I go to great lengths to discuss and define convexity in my blog on Apple and its share split (here).
Want a simple way to think of convexity? The higher the convexity number computed by Model Price Theory (MPT), the higher the valuation of the company. To crunch this number takes a lot of computer power on our part but integral to understanding the valuation mysteries of the market. Also our convexity variable is embedded in our model price algorithm and necessary for its calculation.
Looking at the history of our convexity calculation you can observe that back in 1996 Intel had a convexity variable of 9 and it has been falling steadily since this peak. Again this variable is CEO controlled in the way she structures the balance sheet of the company.
For interest and giggles sake, with a convexity reading of 9 and a ratio of 9 times earnings versus Theoretical Earnings (TE), Intel traded at a valuation level of EBV+8 in 2000. Looking at our Facebook App for Intel shows if Intel was trading at EBV+8 today the stock price would be over $170 a share from the current $34! (Yes, that’s only a difference in market capitalization of $675 billion dollars.)
Both mind boggling in terms of potential gains for investors and proof what the market can reward management for good financial decision-making.
Irrespective of the glory days, Intel’s convexity is hitting new lows as you can observe on the above chart.
You guessed it, “Strike Three!”
So what does all the financial analysis mean?
My initial excitement on this most recent positive transit is waning. Certainly if earnings were to spike to record highs Intel could very well capture the valuation space between our model price calculation and its current trading price. Still representing a 40% upside target.
Not bad, yes?
A quick google search tells me Brian Krzanich took the reins as CEO back in May 2013. What does MPT tells us about his tenure so far? He’s no Jack Welch according to Model Price Theory (MPT).
Looks like just another ‘care taker’ CEO, unfortunately. I was hoping for so much more.
So to be clear I like Intel, and still see the value gap between where the stock is trading and our calculation of model price closing giving further gains to shareholders – see enclosed model price chart from Facebook. As of today, as I write this blog, Intel is our largest position or weight in our Acker Finley Select US 50 Fund with an unrealized gain of 47%. It’s just I was hoping or potentially intrigued that Intel may have the ability to be a 5 or 10 ‘bagger’ (5 times our original investment) that I clearly did’t see because of our above MPT analysis and hence this blog post.