Yup, Intel Remains a Great Buy

In my new article I talk about why I think that Intel remains a great buy, despite its recent share-price appreciation.  As always huge risks exist, but I think the company is at the current price of around $28/share, because it is 20% or greater below my best guess as to the fair value of the company, of $35/share.  I also highlight the three best analyst questions from the recent conference call, and I express my worries about recent stock options/sales by the CEO.  For my full article, see here.

A Brief Note on Intuitive Surgical

I first bought into Intuitive Surgical (ISRG) on October 1, 2010, at $286ish/share.  the price dropped and I added at $255ish/share on December 13, 2010.  After things started looking up, I doubled my sharecount on July 18, 2011.  Today the price/share stands at $584.52, and I am very ambivalent about that.

What’s it worth?  What’s the market?  What’s the future?  It’s clear ISRG has many years of growth ahead of it, but the question is growth at what level.  Here is what i part of what I wrote in my trading notes when i bought it for the first time, in October 2010:

Valuation: As I said above, at $390/share, I was freaked. Frankly, I’m still freaked. I’m not putting my life savings in this one. But today ISRG trades at $283.74. That represents a PEG ratio of 1.1, which is not unreasonable at all. That represents more than $100/share (>25%) off the 52/week high. The P/E is 36.2, the forward P/E is however ‘only’ 27.3. But with this company you have to think about the growth and moat. I think it has tremendous growth opportunities as detailed above, and it has a moat that comes from large switching costs, and sunk costs, once hospitals have the devices and people are trained. Hospitals in my area actually advertise that they have it, as a way to get people to go there. Discounted cash flow shows that this stock is still fairly richly valued; you need to plug in some serious, serious growth assumptions (I’m talking 20%-plus growth rate for ten years, with 3% terminal growth, 10% discount rate) for a purchase to make basic financial sense. To have a real margin for error, you need BETTER than that.

There is no question that ISRG is now priced even more optimistically than it was at that time.  The P/E is now 47.4 (!).  The forward P/E is 37.1.  The PEG ratio is up closer to 2.  I reran my free cash flow spreadsheet today.  The link is here.  I use a WACC of 10.8% for my discount rate.  I add in the $1 billion in cash-on hand. 

I should say I have one issue with the cash flow sheet.  And that is that a LOT of operating cash flow comes from “stock based compensation.”  Estimated final value of stock options must be expensed on the income statement, but issuing stock or options does not require cash, so the amount expensed is added back here.  I get it.  It’s a Young Tech Company thing.  It’s an accounting convention to get us back to ‘true’ net income.  It’s just that the granting of options is ultimately a claim on my future free cash flows, once they are exercised.  So I have a hard time crediting the company with the full amount of this portion of free cash flow.  i’m not going to let it freak me out, but i have my eye on it.

BOTTOM LINE:

  • for you to think ISRG is fairly-valued today, you need to be confident that it can grow its free cash flow by greater than 21.5% annualized for the next ten years.
  • and for you to think you are getting it at a 20% discount to its intrinsic value, you need to believe it will grow by 25% annualized for the next ten years.

Do you?  I thought the first one of those when I bought it a year and half ago and nine months ago at vastly lower price multiples (even though they seemed high at the time).  I still think it’s pretty possible, though I don’t have the balls to add at this point.  For me it’s a hold.  Also concerning from the pov of a shareholder is that new techniques for ultrasound therapy for prostate cancer may really cut into the company’s traditional bread-and-butter revenue-base.  (Though ISRG is expanding fairly rapidly into new procedures as well.)  Europe will eventually come back and provide new revenue sources, and of course there is the entire rest of the world to consider.  I’ll certainly be looking closely at any pullbacks.