Intel's P/E Goes Forth and Multiplies By Cody Willard RealMoney.com Contributor 7/12/2005 3:00 PM EDT
Technology
BULLISH
Stocks and markets move higher off earnings growth and multiple expansion.
Intel, like a host of other tech stocks, has rallied nicely while keeping its multiple in check.
There's reason to expect stocks like Intel to begin to trade at a premium to the market.
There are two primary things that can drive a stock upward. The first is earnings growth. The second is multiple expansion. The market often rewards earnings growth with multiple expansion and that -- in a nutshell -- is often what drives a bull market. So let's look at the numbers from Intel (INTC - commentary - Cramer's Take), the tech poster child and semiconductor bellwether.
The market expects that Intel can earn $1.56 a share in 2006, and at a recent share price of $27.65, that gives it a forward P/E of about 17. Intel's earnings estimates for next year, as well as for this quarter and this year, have been rising all over the Street. A month ago, that 2006 estimate was $1.50 and three months ago it was $1.45 (which is now what analysts expect for 2005). Intel's stock, meanwhile, has risen to the current quote from $26.50 a month ago and about $23.50 per share three months ago.
The upshot is that even as Intel's stock has risen $4 and nearly 20% from the late-April lows, the P/E has essentially stayed the same, at about 17, because estimates were raised along the way.
Recent Intel P/E History
Time
Earnings Estimate
Stock Price
Fwd P/E
Today
$1.56
$27.50
17.6
1 month ago
$1.50
$26.50
17.7
3 months ago
$1.45
$23.50
16.2
Now let me make it clear that the $1.56 estimate for next year is far from certain. In fact, much of the reason next year's estimates have been continuously raised is simply because Intel's business in the near term has been and continues to be very strong, making analysts feel comfortable putting in some small growth in earnings for the company next year -- as they love to extrapolate near-term trends into the future. So assuming that the $1.56 in earnings remains somewhat close to reality, the question -- which raises additional questions -- then becomes whether the market is going to award a higher multiple on those earnings.
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At time of publication, the firm in which Willard is a partner was long Cisco calls, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. At time of publication, the firm in which Willard is a partner had no positions in any of the securities mentioned in this column, although positions can change at any time and without notice. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback -- click here to send him an email.
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