8-9 HIGH-GROWTH OR STABLE-GROWTH FIRM? Intel Corporation is a leading manu- facturer of semiconductor chips. The firm was incorporated in 1968 in Santa Clara, California, and represents one of the greatest success stories of the computer age. Although Intel continues to grow, the industry in which it operates has matured, so there is some question whether the firm should be evaluated as a high-growth company or stable-growth company from now on. For example, in December 2007, the firm's shares were trading for $20.88, and has a price-earnings ratio of 17.622. Compared to Google Inc.'s price-earnings ratio of 53.71 on the same date, it would appear that the decision has already been made by the market. Intel's expected earnings for 2007 were $1.13 per share, and its payout ratio was 48%. Furthermore, selected financial data for the sector, industry, and seven of the larg- est firms (including Intel) are found in Exhibit P8-9.1 on page 301. a. Is Intel's current stock price of $20.88 reasonable in light of its sector, industry, and comparison firms? Market Cap Price to Book Value Net Profit Margin Price to Free Cash Flow P/E Comparable Finns Return on Divideod Long-Term Equity % Yield Debt to Equity 14.94% 1.48% 0.87 18.40% 1.41% 0.649 5.40% 75,481 16.606 15.900 50.471 10.11 7.90% -134.9 4.257 Description Sector industrial goods Industry: industrial equipment and components Emerson Electric Co. Parker Hannifin Corp. Roper Industries Inc. Pentair Inc. Walter Industries Inc. $34.61B 19.276 9.81B 14.150 4,44B 24.685 3.23B 17.943 2.19B 23.537 23.72% 18.16% 14.27% 11.56% 15.70% 2.40% 1.20% 0.50% 1.70% 0.494 0.308 0.603 0.485 4.036 2.298 3.122 1.974 2.731 9.54% 8.25% 11.89% 4.48% 65.156 34.392 232.735 147.667 -10,682 7.38% Exhibit P8-9.1 Industry Companies for Intel Corporation Return on Market Cap P/E Equity % Dividend Yield % Description Sector: technology Industry: semiconductor -broad line Price to Book Value Net Profit Margin 5.344.81B Long-Term Debt to Equity 0.691 0.096 Price to Free Cash Flow 27.716 19.9 252.89B 14.77% 16,20% 1.90% 1.30% 5.588 3.42 10.39% 15.50% 55.435 1933 120.51B 17.622 19.63% 22.94% 3.437 44.62B 11.08 0.064 0.004 0.209 1.90% 0.50% 0.70% 0.00% 18.72% 18,67% 16,35B 24.959 7.81% 12.61% 3.71 1.764 2.088 121039 -5.577.55 -11.219 -58.916 11.79B 21.152 Intel Corp. Texas Instruments Inc. STMicroelectronics NV Advanced Micro Devices Inc. Analog Devices Inc Maxim Integrated Products Inc. National Semiconductor Corp. 0.138 8.24% 10.13% 11.48B 1.90% NA 22.667 23.025 15.42% 16.93% 311.392 10.28B 1.90% 3.342 3.681 21.48% 21.39% NA NA 8.04B 18.49 25.67% 0.60% 0.012 4.481 22.18% 154.183 b. Intel has a beta coefficient equal to 1.66. If we assume a risk-free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return for Intel's stock using CAPM? What rate of growth in earnings is consistent with Intel's policy of paying out 48% of earnings in dividends and the firm's historical re- turn on equity? Using your estimated growth rate, what is the value of Intel's shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model. c. Using your analysis in Problem 8-9(b), what growth rate is consistent with Intel's current share price of $20.88? d. Analysts expect Intel's earnings to grow at a rate of 12% per year over the next five years. What rate of growth from year 6 forward (forever) is needed to warrant Intel's current stock price (use your CAPM estimate of the required rate of return on equity)? (Hint: Use a two-stage growth model where Intel's earnings grow for five years at 12% and from year 6 forward at a constant rate.)
