1. Valuation and Value Creation Final
Consulting Project
Intel Strategy for Maximizing Long-Run Value
April 23, 2016
2. 1
Executive Summary
Intel Corporation operates in the semiconductor industry as a mature, vertically integrated chip
designer and manufacturer. Their long-term presence in this industry, combined with a
reputation for quality and innovation has allowed them to gain and maintain market share in
target markets for more than twenty years. However, the transition away from PC’s to mobile
devices has allowed competitors to enter the market, and Intel has stumbled in their attempt to
pivot their strategy to address this critical new market. Our discounted cash flow model
accurately predicts Intel’s share price of $31.97 within a small margin of error of only 11
cents. After carefully analyzing for key value drivers and sensitivity we are able to provide
recommendations to increase the share price by 21% to $38.58 per share. Our recommendations
focus on reducing costs and optimizing efficiency in the following areas: R&D, Capital
expenditures and asset utilization, and SG&A - primarily marketing.
Strategic Overview
The consumer market is changing rapidly as mobile devices have become a normal part of our
lives over the past decade and demand for PCs is declining. Intel has not optimized in this market
and is adopting new strategies. Intel’s recent reorganization, which included reducing workforce
by 11%, signals its goal of growing in the Data Center and Internet of Things segments of the
market to advance cloud computing and B2B platforms (see Exhibit 1). New market entrants
attracted by high profit margins are increasing and technological change is an ongoing necessity.
In Exhibit 2 we detail Porter’s 5 Forces showcasing Supplier Power as being low due to the shear
volume Intel commands in the market. Consumers have Mixed Power since the there are few
alternatives, however the move towards mobile devices is cause for action. Competitive Rivalry
is high since low cost design model uses foundry manufacturers to undercut the market and large
3. 2
consumers are beginning to vertically integrate forcing Intel to keep prices low. The Threat by
New Entry is low since Entry still requires heavy investment in R&D and up front capital.
Financial Analysis
Advanced Micron (AMD), Intel’s biggest rival, dwarfs Intel threefold in terms of 2015 sales
($16B vs. $55B). As a large, well established franchise, Intel is closely tied to the overall market
performance and has a Beta of 1.05 (see Exhibits 3 and 6). Micron is noticeably more volatile to
market forces. In 2015, Intel Corporation saw a slight decline in performance and share price
from $33.04 to $31.02 for 2014 to 2015, which is expected given close tie to market performance
and the 2015 S&P500 decline of 2.7%. The more volatile competitor suffered a share price
decline of 62% for the 2015 year. Intel’s core performance and financial strength is detailed in
Exhibit 4. Intel’s Quick Ratio shows it has sufficient cash to meet current liabilities 2 times
over, and we see little variance in ratios between 2013 to 2015. However, there was a significant
increase in its Debt to Equity Ratio (D/E) between 2014 and 2015 of 11% points to 32%. Intel
acquired long term debt of close to $8 billion in 2015 to further grow and expand development in
the cloud computing and business development offerings. The DuPont method was used to
disaggregate Return on Equity (ROE), highlighting driving factors for Intel’s performance.
Micron has a ROE of 21.82% compared to Intel of 18.42%, which is due to Micron managing its
assets more effectively in terms of converting assets to sales and funding assets with more debt.
Intel is more effective in terms of operating efficiency with a higher net profit margin for 2015
over its competitor. The same is reflected again in the Operating Return on Investment
(ORI) with Intel’s 3 year low at 13.3% being nearly a full percentage point higher compared to
Micron’s ORI at 12.4%. Intel is more capital intensive and relies on scalability to meet
consumer demand as compared to Micron.
4. 3
Valuation
A discounted cash flow method was used to value Intel enterprise at $31.89 per share (see
Exhibit 7). Intel’s current share price (as of close on 4/21/16) is $31.97 per share. The 52-week
historical prices have ranged from $24.87 to $35.59 per share, with beta of 1.05. The current
value of Intel’s shares being less than 5% different than our valuation model provides a platform
for sensitivity analysis and projections. Intel’s WACC is 7.72%, Intel’s cost of debt was
calculated by using the 2015 annual statement and using a weighted average of all debts which
mature post 2020 (see Exhibit 8). Estimates provided by Value Line, a 3rd party analysis and
forecasting company, are used to estimate key value drivers for 2016 and 2017 and project a
target range for 2019 and 2021. This final estimate was used as the 2020 value in our value
driver analysis. Value Line offers direct information regarding sales, operating margins, tax
rates, net working capital, capital spending, and depreciation. Exhibits 9 summarizes the
projections estimates, and Exhibit 10 shows how the projections for key value drivers change
over time.
Full Valuation Model:
Intel Strategic Value
Model.xlsx
5. 4
Analysis of the Company's Value Drivers
Capital Structure: WACC was estimated over a range of D/E by finding the unleveraged beta
and re-leveraging to account for the varying degrees of financial risk. As an approximation, the
cost of debt was assumed constant across the range of D/E evaluated (see Exhibit 11). WACC
was highly insensitive to changes in capital structure as shown in Exhibit 12. As a result,
varying leverage is not an effective lever for increasing shareholder value through reducing the
WACC. Specifically, increasing D/E to 100% from baseline of 13%, a 7.4x increase in debt,
only results in a decrease in the WACC of 0.18%.
Sensitivity Analysis of Various Value Drivers: As shown in Exhibit 13, a sensitivity analysis
was performed across a range of -20% to +20% of baseline for numerous inputs to determine
sensitivity of that input to cash flows and ultimately the equity valuation. The valuation of Intel
was highly sensitive to COGS and moderately sensitive to R&D Expenses. Net Fixed Assets, and
SG&A Expenses which are our strategic focus to improve value for Intel.
Strategy for Increasing Shareholder Value
A significant reduction in COGS would be difficult to achieve since raw materials are mainly
commodities and overseas production for older products is already optimized. Intel’s newer
innovations require manufacturing expertise and high intellectual property not found
abroad. Research and development investment is critical for Intel to remain competitive,
however, partnering with academia and broader industry consortiums can reduce R&D costs
while continuing to innovate. Samsung, IBM, and Micron are already part of consortiums to
share early R&D costs. Partnering with suppliers to push innovation down the supply chain can
cut costs. Sharing internal data and fostering collaboration can reduce R&D burden. By adopting
these two strategies, it was estimated that Intel could save approximately 5% from its Other
6. 5
Operating Expenses, which are primarily R&D.
There may be some opportunity to consolidate and globalize production, but the opportunities
are seen as small. As the foundry model of chip production becomes more common, vertically
integrated companies will need to compete with the foundry companies. This means that
efficiency and utilization of capital assets will become a critical consideration. Reductions of
3% in Net Fixed assets costs beginning in 2016 can be realistically achieved.
Finally, SG&A may be reduced significantly by reducing costs associated with advertising.
Although Intel relied heavily on advertising to build market share to its current level, it now
relies more on its established relationships with computer and smartphone manufacturers and the
quality and reputation of its products to generate sales. It is recommended that Intel reduce
advertising costs by 25% to $1.35B beginning in 2016 from $1.8B in 2015. This equates to a
5.7% decrease in SG&A expenses from 2015 levels.
Exhibit 14 estimates the improved cash flows and shows an improvement of greater than 12%
for each year. By making these three strategic changes, the discounted cash flow method results
in a valuation of $38.58 per share, an increase of approximately 21% from the baseline valuation
and the current share price (see Exhibit 15).
7. 6
Summary and Conclusion
Intel Corporation enjoys market leadership in two business segments that are continually
evolving. High profit margins and aggressive competitors such as Micron call for increased
improvement to stay competitive and continue to add long term shareholder value. Intel is
reorganizing operations and funding capital expenditures with an increase of $8 billion in
debt. Our sensitivity analysis and projections are able to demonstrate that increasing the
valuation per share by 21% is feasible, elevating current per share price from $31.97 to $38.58.
Cost reductions can be achieved by creating synergies with academia and research partners to
lower R&D. Operational efficiencies can be improved from data sharing with suppliers and
improving manufacturing to lower costs and improve cash flow. Finally, marketing expenses
can be significantly reduced, leveraging technology and manufacturing expertise and established
relationships and reputation to continue to maintain market share.
20. 1
References
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