Research Paper_Stock Valution

Stock Valuation and Investment Analysis of Intel
Corporation and Texas Instruments: A Comparative
Assessment
Prepared by
Melih Komuscu
Approved by
Dr. John Stowe
Department of Economics
Ohio University
July 28, 2015

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TABLE OF CONTENTS
Introduction ………………………………………………………………………….. 2
Literature Review …………………………………………………………………… 2
Financial Aspects …………………………………………………………………… 4
Associated Business Risks ………………………………………………………. 17
Business Valuation Approaches and Models …………………………………. 19
Judgment of the Valuation Results ……………………………………………… 37
Future Outlook and Recommendations ………………………………………… 39
References …………………………………………………………………………… 42
Appendix ……………………………………………………………………………… 44

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1. INTRODUCTION
Providing an independent, professional business valuation is a critical step in wealth management
and succession planning for companies. Enterprise value and equity value are two common ways
that a business may be evaluated. The purpose of this research paper is to provide stock (equity)
valuation of the two main technology firms that are global suppliers of semiconductors, namely Intel
Inc (INTC) and Texas Instruments (TI), and offer investors buy or sell recommendation by using
absolute and relative valuation models. Intel is the world's leading semiconductor producer and has
been leading the industry since the inception of the personal computer. TI is the third largest
manufacturer of semiconductors worldwide after Intel and Samsung and the largest producer of
digital signal processors and analog semiconductors. Both companies are considered to be industry
peers dominating in the semiconductor and related device manufacturing. As any other company
investing in technological products, the both companies face certain business risks since they
operate in highly competitive industries. The cyclical industry in which Intel and Texas Instruments
operate may cause their profitability to fluctuate regardless of how successful they are in tailoring
their processors to new markets.
A comparative assessment of equity valuation of Intel Corporation and Texas Instruments
companies was performed in this research paper by employing both absolute and relative stock
valuation models. The paper starts with introduction of the both companies and provides an
overview of their business risks. Next, a brief literature is presented to discuss recent work on the
business valuation of the two companies. Then, financial conditions of the both companies are
discussed in a comparative manner. In the methodology part of the paper, I discussed in detail,
models which I built to estimate the stock price of the both companies. These stock price valuation
models include Discounted Dividend Valuation, Free Cash Flow model, Residual Income Model,
and valuation based on market multiples model. Since valuation involves one than one company,
both absolute and relative valuation methods are employed in the study. The final part of the paper
will discuss judgment for the valuation and make a buy or sell recommendation for the investors
who have shares of stocks of the both companies or for people going to invest in them.
2. LITERATURE REVIEW
A business valuation is a detailed financial analysis that gives an estimated range of what a
company is worth (Trugman, 2012). A business valuation might include an analysis of the
company's management, its capital structure, and its future earnings prospects, as well as the
market value of its assets. Business valuation is used to set the fair market value of the shares of a
business. It helps to know how much the business is worth. The business valuation analysis is
especially useful in various situations, such as a transaction (purchase or sale of a business), tax
reorganization, and integration of a new shareholder or in the context of litigation.

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Business valuation of a company can be performed by using different approaches (Zwilling, 2009).
One main approach is asset valuation. It focuses on a company's net asset value, or the fair-market
value of its total assets minus its total liabilities. Another way to look at valuation is market
approach, which is based on estimating a company’s earning potential based on theoretical
demand in the market. Another method is income valuation. The method, used extensively by
financial analysts, involves projecting a company’s future cash flows and discounting them, at some
rate, to arrive at their value in present dollars. Of all valuation approaches, the asset approach is the
most tangible. Overall, business valuation is a very challenging task for many reasons. Analysts
must cope with uncertainties related to model appropriateness and the correct value of inputs
(Trugman, 2012). An analyst’s final decision depends not only on the comparison of the estimated
value and the market price but also on the analyst’s confidence in the estimated value.
In financial markets, stock valuation is the method of calculating theoretical values of companies
and their stocks (Investopedia, 2015). The main use of these methods is to predict future market
prices, or more generally, potential market prices, and thus to profit from price movement. Stock
valuation aims to give an estimate of the intrinsic value of a stock, based on predictions of the future
cash flows and profitability of the business. Depending on whether stocks are judged as
undervalued or overvalued, buy or sale recommendations are advised to investors. In this regard,
valuation is the first step toward intelligent investing.
There are many different ways to value stocks. The key is to take each approach into account while
formulating an overall opinion of the stock. If the valuation of a company is lower or higher than
other similar stocks, then the next step would be to determine the reasons. The fundamental
valuation is the valuation that people use to justify stock prices (Investopedia, 2015). Most common
valuation methods are absolute and relative valuation (Pratt, 2008). Absolute valuation models
attempt to find the intrinsic or "true" value of an investment based only on fundamentals. Looking at
fundamentals simply means one would only focus on such things as dividends, cash flow and
growth rate for a single company. Valuation models that fall into this category include the dividend
discount model, discounted cash flow model, residual income models and asset-based models. In
contrast to absolute valuation models, relative valuation models operate by comparing the company
in question to other similar companies. These methods generally involve calculating multiples or
ratios, such as the price-to-earnings multiple, and comparing them to the multiples of other
comparable firms. For instance, if the P/E of the firm you are trying to value is lower than the P/E
multiple of a comparable firm, that company may be said to be relatively undervalued. Generally,
this type of valuation is a lot easier and quicker to do than the absolute valuation methods, which is
why many investors and analysts start their analysis with this method.
Both Intel Corporation and Texas Instrument companies was subject of many business valuation
studies in past, and also many finance web sources such as Morningstar, Yahoo Finance, and
NASDAQ provide current data for business valuation of the both companies. Morningstar lists only

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publicly traded Advanced Micro Devices (AMD) as a competitor for Intel. On the other hand, Yahoo!
Finance considers publicly traded Texas Instruments (TXN) and privately held Samsung Electronics
as competitors.
Intel currently derives approximately 50% of its valuation from the PC market (Forbes, 2015). The
company has been the dominant leader in the notebook and desktop processor and chipset market
for years, and currently accounts for more than 80% of the market. It is forecasted that Intel’s PC
market share may decline marginally over the next few years due to the entry of ARM based
players to intensify competition in the market. However, even if Intel’s market share in PCs declines
drastically, it is not expected to have a significant (>5-10%) impact on valuation for the company.
Intel Corporation is priced very attractively with a total value of $137.44 billion, only 6.76 times
higher than its latest quarterly net income plus depreciation (www.marketgrader.com).
Investment analysts recommend investors to have the TXN shares in portfolio for a number of
reasons, mainly high annual dividend ($0.1.24 in 2014) and growth history of the dividend payments
(http://www.stocktradersdaily.com). The company has paid higher dividends every year since it
started increasing its dividends in 2004 (Texas Instruments, 2015). Although that rate of increase
isn't likely sustainable, it shows company's commitment to its dividend in spite of the looming
investment tax law changes. Moreover, with a payout ratio of 52.1% in 2014, the company retains
more than half of its income to reinvest for future growth. By a discounted cash flow analysis, the
company looks to be worth around $55.9 billion, making its recent market price of $52.6 billion look
reasonable.
3. FINANCIAL ASPECTS
3.1. Intel Corporation
Intel Corporation (ticker symbol: INTC) was founded in 1968 and is based in Santa Clara, California.
The Intel Corporation designs, manufactures, and sells advanced integrated digital technology,
primarily integrated circuits and semiconductors, for industries such as computing and
communications. In 1971, Intel introduced the first microprocessor after several years of producing
semiconductor-based memory storage products, revolutionizing the shape of the global computing
industry. The company's most important products remain its microchips, which power a huge
number of the personal computers, tablets and smartphones around the world (Nasdaq, 2015).
However, it also manufactures a wide variety of different chipsets, memory solutions, mobile phone
components, software and services.
Currently Intel is the world's leading semiconductor producer and has been leading the industry
since the inception of the personal computer. The company also offers a wide range of
technological products for data processing, data storage and wired network connectivity products. It
develops and manufactures mobile communications components and offers software products for
endpoint security, network and content security, risk and compliance, and consumer and mobile

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security. The company sells its products primarily to original equipment manufacturers, original
design manufacturers, and industrial and communications equipment manufacturers in the
computing and communications industries. The Intel also invests significantly in research and
development (R&D), and the high R&D funding has allowed Intel to maintain its leadership position
in the semiconductor industry.
Although Intel's principal executives offices remain in California and the technology company is
incorporated in Delaware, its manufacturing and research facilities sprawl across the United States
and, indeed, the globe, with major operations in New Mexico, Arizona, Massachusetts, Ireland, and
China.
Intel Corporation is the world's largest semiconductor chip maker, based on revenue. In accordance
with recently published financial statements, Intel Corporation has Current Valuation of $146.33
billion (www.intc.com). The total revenue of the company in 2014 was $55.8 billion, a 6 percent
increase over the 2013 earnings. Total revenue of the company for the last quarter of 2014 was
reported as $14.7 billion, a % 1.3 percent decline compared to the Q3 earnings of 2014. Net income
of the company in 2014 was $11.7 Billion, nearly a 22 percent increase over the 2013 income
figures. On March 12, 2015, Intel lowered its 1Q15 revenue forecast due to “softer-than-expected
demand for business desktop PCs.” Lower-than-estimated inventory levels across the PC supply
chain also contributed to the lower revenue outlook. As a result of lower revenue expectations,
Intel’s share declined by 4% during early part of March 2015. In 1Q15, Intel’s (INTC) CCG (Client
Computing Group) segment reported revenue of $7.42 billion - a decline of 8% on a year-over-year
basis. Reduction in the global PC shipments, partially due to slow refreshment of Microsoft (MSFT)
Windows XP, was kept responsible for this segment’s negative growth. Macroeconomic and
currency fluctuations, especially in Europe (EZU), contributed to the decline as well. Financial
statements of the company for 2014 fiscal year indicate a 10.61% return on assets while the return
on equity resulted in 20.51% (Morningstar, 2015a). Earnings per share in Q4 of 2104 was $2.31, a
22 percent increase over the Q3 of 2013’s earning figure. Intel’s success has been reflected in its
stock price.
Intel makes every effort to use its manufacturing leadership to transform the company by
developing leadership products across a broad range of end-markets (Forbes, 2015). Majority of the
revenue is generated by the PC Client Group (PCCG) operating segment (% 62), followed by the
Data Center Group (DCG) operating segment (26 %), the Internet of Things Group (IOTG)
operating segment, the Mobile and Communications Group (MCG) operating segment, and the
aggregated software and services (SSG) operating segments (US Securities and Exchange
Commission, 2014).
Risk factors facing the company can be described as downturn in general business conditions or
the technology industry in particular, currency and commodity price fluctuation, disruption of the

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global supply chain and major shifts in business and consumer and behavior for tech products
(Morningstar, 2015a).
Following charts present some figures for the financial status of the Intel Corporation’s. The
company’s revenues are growing in recent years despite fluctuations. The net income of the
company peaked in 2011, declined slightly in the following 2 years but then picked again in 2014.
Source: Morningstar Investment Report for INTC (10 June 2015)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenue (in billions) 38,826 35,382 38,334 37,586 35,127 43,623 53,999 53,341 52,708 55,780
0
10,000
20,000
30,000
40,000
50,000
60,000
Revenue (in billions)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net Income (in billions) 8.66 5.04 6.97 5.29 4.36 11.46 12.94 11 9.62 11.7
0
2
4
6
8
10
12
14
Net Income (in billions)

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Earning Per Share (in dollars) 1.42 0.87 1.2 0.93 0.79 2.06 2.46 2.2 1.94 2.39
0
0.5
1
1.5
2
2.5
3
Earning Per Share (in dollars)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EBITDA (in billions) 17.22 12 13.97 12.31 10.75 20.68 23.88 22.48 20.88 23.89
0
5
10
15
20
25
30
EBITDA (in billions)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Free Cash Flow (in billions) 9 4.84 7.62 5.72 6.65 11.48 10.19 7.85 10.02 10.22
0
2
4
6
8
10
12
14
Free Cash Flow (in billions)

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As reflection of the net income, the earnings per share were highest in 2011, and then increased
again after two years of slight drops. A similar trend was observed with the EBITDA figures. On the
other hand, free cash flow figures of the company were more stable during 2013 and 2104 after a
sharp decline in 2012.
Source: http://finance.yahoo.com (historical prices for the INTC shares)
As seen in the above figure, share prices of the company were stable between 2005 and 2010, with
an exception of s sharp decline in 2009. The prices have been in rising trend since that drop and
are standing around $32 currently.
3.2. TEXAS INSTRUMENTS (TI)
Texas Instruments Incorporated (Ticker Symbol:TXN) is one of the largest global semiconductor
manufacturers and electronics designers. The company generates more than 95% of its revenue
from semiconductors and the remainder from its well-known calculators. TI is the world's largest
maker of analog chips, which are used to process real-world signals such as sound and power. TI
also has a leading market share position in digital signal processors, used in wireless
communications, and microcontrollers used in a wide variety of electronics applications.
Over the past few years, TI has undergone a strategic transformation and as a result, today is a
company focused on Analog and Embedded Processing (Texas Instruments, 2015). These
continue to be some of the best opportunities inside of the semiconductor market, offering
compelling financial characteristics, growth, diversity and stability. TI has a leading market share
position in several chip segments, such as analog and digital signal processors. A key element of
0
10
20
30
40
50
60
Intel Corporation (INTC)
Adj Close Shares between Jan 2010- June 2015

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TI's success has come from its massive global sales staff, which allows the firm to cross-sell its
extensive semiconductor product portfolio to existing customers.
TI’s business model is also carefully constructed around several advantages that are unique to it
(Texas Instruments, 2015). The company has the industry’s broadest portfolio of differentiated
analog and embedded processing semiconductors. It has s strong foundation of manufacturing
technology and low-cost production and industry’s largest market channels. Diversity and longevity
in their products and in the markets they serve put them in an advantageous position over its
competitors. These advantages have resulted in consistent share gains and free cash flow growth,
and they put us in a unique class of companies with the ability to grow, generate cash, and return
that cash to shareholders.
Revenue of the company in 2014 was $13.05 billion, up $840 million, or 7 percent, from 2013 due to
higher revenue from Analog and Embedded Processing (Morningstar, 2015b). Gross profit was
$7.43 billion, an increase of $1.06 billion, or 17 percent, from 2013 primarily due to higher revenue
and, to a lesser extent, a more favorable mix of products shipped. Gross profit margin was 56.9
percent of revenue compared with 52.1 percent in 2013. Operating expenses were $1.36 billion for
R&D and $1.84 billion for SG&A. R&D expense decreased $164 million, or 11 percent, from 2013
primarily due to savings from ongoing efforts across the company to align costs with growth
opportunities, including the previously announced wind-down of its legacy wireless products and
restructuring actions in Embedded Processing and Japan. R&D expense as a percent of revenue
was 10.4 percent compared with 12.5 percent in 2013. TI’s revenue in the June 2015 quarter was
$3.23 billion, up 3% sequentially but down 2% from the year-ago quarter and just below the
midpoint of the firm’s revenue forecast of $3.12 billion-$3.38 billion.
Following charts present trends in certain financial indicators of the Texas Instruments in recent
years. The company’s revenues are growing in recent years despite some irregularities. Net income
in 2014 was $2.82 billion, an increase of $659 million, or 30 percent, from 2013. EPS was $2.57
compared with $1.91 in 2013. EPS benefited $0.07 from 2013 due to a lower number of average
shares outstanding as a result of its stock repurchase program.

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Source: Morningstar Investment Report for TXN (10 June 2015)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenues (in millions) 13,392 14,255 13,835 12,501 10,427 13,966 13,735 12,825 12,205 13,045
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Revenues (in millions)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net Income (in billions) 2,324 4,341 2,657 1,920 1,470 3,228 2,236 1,759 2,162 2,821
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Net Income (in billions)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Earning Per Share (in dollars) 1.42 2.84 1.88 1.47 1.16 2.66 1.91 1.53 1.94 2.61
0
0.5
1
1.5
2
2.5
3
Earning Per Share (in dollars)

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EBITDA (in billions) TXN 4,555 4,853 4,763 3,540 2,916 5,427 4,012 3,319 4,146 5,198
0
1,000
2,000
3,000
4,000
5,000
6,000
EBITDA (in billions) TXN
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Free Cash Flow (in billions) 2,442 1,188 3,720 2,567 1,890 2,621 2,440 2,919 2,972 3,507
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Free Cash Flow (in billions)

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Source: http://finance.yahoo.com (historical prices for the TXN shares)
3.3. Comparison of the Financial Data
In this part of the paper, the financial figures of the both data were compared. As noticed, the Intel’s
revenues have been significantly above those of the Texas Instruments over the last decade. One
interesting feature of the revenue figures is that while the Intel revenues are at upward trend since
2009, the revenues of TI indicated more stable growth.
Source: Morningstar Investment Reports for INTC and TXN (10 June 2015)
0
10
20
30
40
50
60
70
80
Texas Instruments Shares Adj Close
Adj Close TXI
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Intel 38,826 35,382 38,334 37,586 35,127 43,623 53,999 53,341 52,708 55,780
TXN 13,392 14,255 13,835 12,501 10,427 13,966 13,735 12,825 12,205 13,045
0
10,000
20,000
30,000
40,000
50,000
60,000
Revenues (in millions)

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Net income of the both companies also differs significantly. The net income fluctuates for the both
companies during the last 10 years. On the other hand, the net income of the Intel has been on rise
steadily since 2012 while the net income of the TI has been on downward trend during the same
period.
With exception of 2011 and 2012, the earning per share (EPS) of the TI is significantly higher than
that of the Intel during the last 10 years.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Intel 866 504 697 529 436 1146 1294 1100 962 117
TXN 2324 4341 2657 1920 1470 3228 2236 1759 2162 2821
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Net Income (in millions)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Intel 1.42 0.87 1.2 0.93 0.79 2.06 2.46 2.2 1.94 2.39
TXN 1.42 2.84 1.88 1.47 1.16 2.66 1.91 1.53 1.94 2.61
0
0.5
1
1.5
2
2.5
3
Earning per share (in dollars)

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Similarly, EBITDA figures significantly differ between the two firms. The EBITDA figures of the Intel
predominate during the last decade over those of the Intel.
When the closing shares of the both firms are compared in the last 15 years, it noticeable that they
exhibit similar temporal trends. Despite some fluctuations, the closing shares of the both companies
are steadily rising since 2009. The upward trend with the Intel shares is especially remarkable since
2013.
Source: http://finance.yahoo.com (historical prices for INTC and TXN shares)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Intel 1722 1200 1397 1231 1075 2068 2388 2248 2088 2389
TXN 4,555 4,853 4,763 3,540 2,916 5,427 4,012 3,319 4,146 5,198
0
1000
2000
3000
4000
5000
6000
EBITDA (in millions)
0
10
20
30
40
50
60
70
80
Sharepriceindollars
Trends in the Closing Shares of Intel and TXN
Adj Close TXN Adj Close Intel

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3.4. Position of the INTC and TXN in the Technology Industry and Sector
It is important to judge relative position of the both companies in their industry and sector. As stated
earlier, the both companies are leading semiconductor producers in the world. First financial
parameter to look at is dividend related figures as they stand currently. The dividend yield of the
both firms is higher than those of the industry and sector with the current figures and 5-year
average dividend. The growth rate of the dividends is also promising as compared to those of the
sector and industry. The payout ratio of the both companies is well-above those of the sector and
industry as well (Source:http://www.stocktradersdaily.com/stock-quotes).
(Source: www.investing.com)
With regard to the management effectiveness parameters, returns on equity and assets are
significantly above the sector and industry figures. In this regard, the TXN is leading over the INTC
as well.
TXN industry sector INTC
Dividend Yield 2.76 0.8 1.46 3.26
Dividend Yield - 5 Year Avg 2.15 1.04 1.38 3.18
Dividend 5 Year Growth Rate 22.47 8.7 20.21 9.95
Payout Ratio(TTM) 45.99 10.35 20.14 38.9
0
5
10
15
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25
30
35
40
45
50
Dividend

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The sales of the both firms outweigh the figures given for the industry and sector. The EPS growth
rate is remarkable in the last 5 years along with the sales.
Return on
Assets (TTM)
Return on
Assets - 5 Yr.
Avg.
Return on
Investment
(TTM)
Return on
Investment - 5
Yr. Avg.
Return on
Equity (TTM)
Return on
Equity - 5 Yr.
Avg.
TXN 16.48 13.91 18.97 16.5 28.05 22.58
industry 1.83 -2.37 1.24 -4.09 -51.47 -14.32
sector 7.63 10.48 10.51 14.4 7.87 13.73
INTC 12.97 14.79 15.39 17.52 20.83 22.37
-60
-50
-40
-30
-20
-10
0
10
20
30
40
Management Effectiveness
Sales (MRQ)
vs Qtr. 1 Yr.
Ago
Sales (TTM)
vs TTM 1 Yr.
Ago
Sales - 5 Yr.
Growth Rate
EPS (MRQ)
vs Qtr. 1 Yr.
Ago
EPS (TTM)
vs TTM 1 Yr.
Ago
EPS - 5 Yr.
Growth Rate
Capital
Spending - 5
Yr. Growth
Rate
TXN 5.6 7.4 4.58 38.64 35.5 17.51 -12.56
industry -6.11 9.69 -1.93 -44.87 0 11.14 -10.12
sector -0.17 1.27 9.85 4.1 0 14.97 13.91
INTC 0.13 5.66 9.73 8.7 26.47 24.5 17.7
-50
-40
-30
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-10
0
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50
Growth Rates

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Finally, the profitability ratios of the both companies perform well as compared to those of the
industry and sector.
4. ASSOCIATED BUSINESS RISKS
As any other company investing in technological products, both Intel Corporation and Texas
Instruments companies face certain business risks since they operate in highly competitive
industries (Morningstar, 2015a and 2015b). Some of those risks are common to the both companies
while the each company has its own peculiar risks. The both companies operate in semiconductor
industry, which has deeply cyclical trends. Demand in up cycles is so high that chip manufacturers
have trouble keeping up. Similarly, if electronic sales, particularly PC sales, are slow, demand for
chips can plunge. The fact that the semiconductor industry is more impacted by the notion of
consumer demand more than corporate demand, also adds to the overall volatility.
4.1. Intel Corporation (Intel)
As stated in previous section, any decline in PC shipment will impact the revenues adversely. The
cyclical industry in which Intel operates will cause its profitability to fluctuate regardless of how
successful it is in tailoring its processors to new markets. Failure to anticipate and respond to
technological and market developments could damage its ability to compete. At the same time,
demand for its products is highly variable. In recent years, the company experienced declining
orders in the traditional PC market segment, which has been negatively impacted by the growth in
ultra-mobile devices such as tablets and smartphones. In other words, increasing demand for
tablets and smartphones had adverse impact for the PC market, resulting in less demand for
computer chips. In fact, Intel preannounced some rather disappointing news for the March quarter
of 2015. On point, revenues were likely $12.8 billion, plus or minus $300 million, compared to prior
Gross
Margin
(TTM)
Gross
Margin
- 5 Yr.
Avg.
EBITD
Margin
(TTM)
EBITD
- 5 Yr.
Avg
Operati
ng
Margin
(TTM)
Operati
ng
Margin
- 5 Yr.
Avg.
Pre-
Tax
Margin
(TTM)
Pre-
Tax
Margin
- 5 Yr.
Avg.
Net
Profit
Margin
(TTM)
Net
Profit
Margin
- 5 Yr.
Avg.
Effectiv
e Tax
Rate
(TTM)
Effectiv
e Tax
Rate -
5 Yr.
Avg.
TXN 57.8 52.33 40.8 33.95 31.9 24.72 31.36 24.43 22.63 18.56 27.83 24.04
industry 7.23 8.36 0 13.85 -11.54 -14.97 -11.02 -16.3 -13.06 -18.73 16.1 19.48
sector 39.93 40.55 0 20.18 10.41 12.27 11.7 13.05 8.07 9.08 27.24 30.23
INTC 63.93 62.62 43.58 42.72 27.39 28.83 28.28 29.71 21.05 21.86 25.55 26.42
-30
-20
-10
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30
40
50
60
70
Profitability Ratios

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guidance of $13.7 billion (Valueline, 2015). The main variable behind the reduction is weaker-than-
anticipated demand for personal computers on the corporate side, along with lower inventories
across the aggregate PC supply chain. Also, currency factors in Europe exacerbated the pressure.
The analysts think that any bad strategy by Intel will lead to AMD capturing market share in the PC
market. Any prolonged delay in process technology by Intel would allow other semiconductor
manufacturers to overwhelm Intel’s lead and or even surpass it. In general terms, the risk factors
that the Intel Corporation can face can be summarized as follow (Morningstar, 2015a). Changes in
product demand may harm financial results and are hard to predict
 Failure to anticipate and respond to technological and market developments could harm its
ability to compete
 Changes in the mix of products sold may harm financial results
 Global operations subject us to risks that may harm results of operations and financial
conditions
 Failure to meet production targets, resulting in undersupply or oversupply of products, may
harm its business and results of its operations
 Having difficulties obtaining the resources or products it needs for manufacturing,
assembling and testing its products, or operating other aspects of our business, which could harm
its ability to meet demand and increase its costs
Changes in product demand, and changes in customers’ product needs, could negatively affect
competitive position of the company and may reduce its revenue, increase its costs, lower its gross
margin percentage, or may even require to write down its assets. In order to be competitive with its
rivals, the Intel Corporation maintains a successful R&D effort, develop new products and
production processes, and improve its existing products and processes ahead of competitors.
Although the R&D efforts are critical to success of the company, the R&D investments may not
generate significant operating income or contribute to its future operating results for several years
and such contributions may not meet its expectations or even cover the costs of such investments.
The company may be unable to develop and market new products successfully, and the products it
invests in and develop may not be well received by customers.
The risks described above are all business-related risks. Surely, there are other risks associated
with macro-economic conditions and political situation. Among the macro-economic risks, inflation,
reductions in economic growth, or recession, can be counted while the political risks may involve
restrictions on access to markets, confiscatory taxation, and expropriation of assets.
4.2. Texas Instruments (TI)
TI's biggest risk is exposure to the cyclical chip industry as any other semiconductor manufacturer
(Morningstar, 2015). Furthermore, relative to some peers like Linear Tech or Analog Devices, TI
has relatively greater exposure to more volatile end markets like PCs and smartphones. The firm
acquired National Semiconductor to expand its manufacturing capacity even further, but some risk

19 | P a g e
still exist that TI will be unable to generate enough analog chip growth, and cyclical downturns in the
industry may provide low business from time to time. Meanwhile, the analog chip market is
fragmented and based on proprietary designs, so market share shifts tend to be quite gradual.
When trends in the industry are taken into account, it can be argued that PC sales strength and
public cloud data center purchases may aid global semiconductor sales in 2015, offset by
weakening handset and tablet shipments and prices. On the other hand, growth in emerging
markets may further damp prices and margins, while regional regulatory issues may add to the
sales challenges. Memory markets probably will continue to benefit from a balanced supply-demand
environment.
Like other companies, TI is susceptible to macroeconomic downturns in the United States or abroad
that may affect the general economic climate and its performance and the performance of its
customers. Similarly, the price of its securities is subject to volatility due to fluctuations in general
market conditions (Texas Instruments, 2015). In general, business risk factors of Texas Instruments
Company can be summarized as follow:
 Cyclicality in the semiconductor
 Profit margins may be adversely affected in the future by a number of factors, including
decreases in shipment volume, reductions in, or obsolescence of inventory and shifts in
product mix.
 Rapid technological change that requires developing new technologies and products.
 Substantial competition that requires to respond rapidly to product development and pricing
pressures.
 Intellectual property rights, and development and licensing new intellectual property.
 A decline in demand in certain markets or sectors
 Risks associated with international political, economic or other conditions.
 Loss of or significant curtailment of purchases by its customers
 Incorrect forecasts of customer demand
 Availability and cost of raw materials, utilities, critical manufacturing equipment,
manufacturing processes and third-party manufacturing services.
 Inability to timely implement new manufacturing technologies or install manufacturing
equipment
 Changes in the financial markets.
5. BUSINESS VALUATION APPROACHES AND METHODS
In this research paper, since the valuation involves one than one company, both absolute and
relative valuation method are employed (Investopedia, 2015). In the relative valuation method, the
selected firms are valued by comparing standardized valuation metrics with those of similar
companies, and it is generally the starting point in peer comparison analysis. The peer group is
often made up of other firms in the same industry, but peers can also be chosen based on other

20 | P a g e
circumstances of the firm. Once the "peer group" is established and their business valuation is
performed, they are compared with the industry averages. This included certain financial metrics
and equity valuation metrics, including price-to-earnings, price-to-sales, price-to-book, price-to-free
cash flow and EV/EBIDTA among others. Aim here is to compare the company's multiples with
those of its peers to assess whether the firm is over or undervalued and determine where the target
firm falls in relation to the its peer firm to make an estimate of the value of an equity position in the
target firm and their relative position in the industry.
For the absolute valuation models, I attempted to find the intrinsic or "true" value of an investment
based only on fundamentals. Looking at fundamentals simply means I focused only focus on such
things as dividends, cash flow and growth rate for a single company. As part of the absolute
valuation models that fall into this category, I used dividend discount model, discounted cash flow
model, residual income models and asset-based models
In summary, the valuation part consists of following sections;
 Explanation/justification of assumptions (discount rates, growth rates, CF’s)
 DDMs, a single-stage one and a two-stage one
 FCFF valuation and FCFE valuation
 Residual Income valuation
 Valuation based on market multiples
All the valuation computations were performed in Excel environment (Jackson and Staunton, 2001).
5.1. Intel Corporation
The procedures employed in the valuation section include actual data for the Intel Corporation from
Morningstar Investment Analysis reports dated 10 June 2015. The input data and assumptions also
vary based on the valuation method and will be explained where necessary.
5.1.1. Discounted Dividend Model (DDM) Valuation
The simplest model for valuing equity is the dividend discount model, namely a method to estimate
the value of a share of stock by discounting all expected future dividend payments. It is simple
procedure for valuing the price of a stock by using predicted dividends and discounting them back
to present value (Investopedia, 2015). The idea is that if the value obtained from the DDM is higher
than what the shares are currently trading at, then the stock is undervalued. The greatest
disadvantage of the DDM is that it is inapplicable to companies which do not pay dividends. The
basic DDM equation is;
       T
T
3
3
2
21
0
k1
D
k1
D
k1
D
k1
D
P







 

21 | P a g e
In the DDM equation:
P0 = the present value of all future dividends
Dt = the dividend to be paid t years from now
k = the appropriate risk-adjusted discount rate
5.1.2. DDM Value with a Single Holding Period
Consider a one-year holding period, in this time frame, an investor will receive a dividend and the
price of the common stock at the end of the one year, both discounted back by the rate of return on
the common equity.
V0 = D1/ (1+r) + P1/ (1+r)
Where,
D1 is the expected dividend after 1 year
P1 is the expected price after 1 year of holding period
r is the required rate of return (discounting rate)
If an investor wishes to buy a share of stock of Intel and hold it for one year, the value of that share
of stock today would be V0 = $30.57. The expected share price of $34.87 is nearly %10 higher than
this figure.
5.1.3. Gordon Growth Model
The Gordon Growth Model (GGM), also known as the dividend discount model (DDM), is a method
for calculating the intrinsic value of a stock, exclusive of current market conditions. The model
equates this value to the present value of a stock's future dividends. One main disadvantage of the
Gordon Growth Model is that it assumes a constant dividend growth rate. In other words, it’s a
constant growth model, and that may be an acceptable estimate for a fairly high-yielding mature
company, but for stocks with lower dividend yields and higher dividend growth, this may not be
appropriate. There are two basic forms of the model: the stable model and the multistage growth
model.
0 1
0
D (1 g) D
V
r g r g

 
 

22 | P a g e
Where;
V0 = Stock Value
D0 = Current dividend
g= dividend growth rate
r= required rate of return
D1 = expected dividend per share one year from now
The market price of $32.46, or approximately 8 percent, more than the Gordon growth model
intrinsic value estimate of $30.11. The Intel Corporation appears to be slightly overvalued, based on
the Gordon growth model estimate.
5.1.4. DDM Two-Stage Model
The DDM Two-stage model can offset the deficiencies of the GGM. It allows to estimate that the
dividend will grow at a certain rate for a number of years, and then slow down to another growth
rate after that. The two-stage DDM is useful because many scenarios exist in which the company
can achieve supernormal growth rate for few years, after which time the growth rate falls to a more
sustainable level. A possible limitation of the model is that the transition between initial abnormal
growth period and mature stage is abrupt.
The model assumes that the first n dividends grow at an extraordinary short-term rate of gs; after
time n, the annual dividend growth rate will change to normal long-term growth rate of gL. Using the
general expression of stock valuation and Gordon growth model, the value at time 0 of this model
is:
 
 
   
   
t nn
0 S 0 S L
0 t n
t 1 L
D 1 g D 1 g 1 g
V
1 r 1 r r g
    
 
   


23 | P a g e
The INTC appears to have a dividend policy of recognizing sustainable increases in the level of
earnings with increases in dividends, keeping the dividend payout ratio within a range of 40 percent.
Considering the different growth rates, the Two-Stage DDM model seems a better choice for the
valuation process. It is forecasted that current dividend of $0.90 will grow by 10 percent
approximately per year during the next 4 years. Thereafter, the growth rate will decline to 9 percent
and remain at that level indefinitely. At the end of the year 5, the stock price is expected to rise to
$60.56 per share, which is significantly above the intrinsic value.
5.1.5. FCFF and FCFE valuations
Free cash flow (FCFF) to the firm is defined s the cash flow available to the company’s suppliers of
capital after all operating expenses (including taxes) have been paid and necessary investments in
working capital (e.g., inventory) and fixed capital (e.g., equipment) have been made (Pinto et. al
2010). In simple terms, FCFF is the cash flow from operations minus capital expenditures. A
company’s suppliers of capital include common stockholders, bondholders, and sometimes,
preferred stockholders. Free cash flow to equity (FCFE), on the other hand, is the cash flow
available to the company’s holders of common equity after all operating expenses, interest, and
principal payments have been paid and necessary investments in working and fixed capital have
been made. FCFE is the cash flow from operations minus capital expenditures minus payments to
(and plus receipts from) debt holders.
The FCFF or FCFE method is useful when certain conditions are met. One or more of the following
conditions should be satisfied in order to use the either valuation method (Pinto et. al, 2010).
 The company does not pay dividends.
 The company pays dividends but the dividends paid differ significantly from the company’s
capacity to pay dividends.
 Free cash flows align with profitability within a reasonable forecast period with which the

24 | P a g e
analyst is comfortable.
 The investor takes a control perspective. With control comes discretion over the uses of
free cash flow. If an investor can take control of the company (or expects another investor
to do so), dividends may be changed substantially; for example, they may be set at a level
approximating the company’s capacity to pay dividends.
FCFF can be determined either by Net Income Approach or EBIT and EBITDA approaches. In this
paper, I used the EBIT Approach.
Where;
EBIT= Earnings before interest
FCInv= Investment in fixed capital
WCInv=Investment in working capital
Dep= Deprecation
In this paper, I used FCF two-stage model. In this model, the first stage of rapid growth for n years
abruptly transitions to a second stage of constant growth that exists in perpetuity.
Free cash flow to equity (FCFE) is the cash flow available to the firm’s common stockholders once
operating expenses (including taxes), expenditures needed to sustain the firm’s productive capacity,
and payments to (and receipts from) debt-holders are accounted for.. Once we have the FCFF, we
can easily calculate the FCFE. Recall that the FCFF is the cash flow available to all firm capital
providers, whereas the FCFE is the cash flow available to only the common equity-holders.
Therefore, in the first formula, we subtract interest payments from FCFF because they are not
available to common equity-holders. We add net borrowing to FCFF because it is the cash flow
available to common equity-holders. (If the firm has preferred shareholders, then preferred issuance
amounts would also be added to get FCFE.)
Recognizing the relationship between FCFF and FCFE in the top formula, we can then calculate
FCFE by using the formulas that calculated FCFF from net income and CFO. Substitution into the
FCFF formulas results in formulas for the FCFE. We could also do this for the formulas for EBIT
and EBITDA if we wished.
For the valuation, following inputs from the Morningstar Investment Report for the Intel Corporation
(Morningstar, 2015a) were used, and some assumptions were made when necessary.
 FCFE FCFF – Int 1– Tax rate Net borrowing 
 
   
FCFF EBIT 1 – Tax rate Dep – FCInv – WCInv
FCFF EBITDA 1 – Tax rate Dep Tax rate – FCInv – WCInv
 
 

25 | P a g e
• Sales are $55,870 million
• Sales will grow at 6% annually for five years, and then at 4% annually thereafter
• EBIT is 14,900 million and is %26.6 of the sales
• Interest expense is $192 million and will increase proportionately with sales
• Depreciation expense is $8,641 million and will increase proportionately with sales
• Gross investment in plant and equip will be 40% of the increase in sales
• New investment in working capital will be 11,711 million and will increase 5 percent each year
• Net borrowing will be 20% of the new investment each year.
• The corporate income tax rate is 25.9%
• The before - tax cost of long-term debt is 5.0%
• The equity beta is 0.96, risk-free rate is 2.0%, and equity risk premium is 6%
• There are 4,736 million outstanding shares

26 | P a g e
Given the results above, Intel Corporation can use free cash flows to manage its capital structure to
finance its new investments and borrowings. The FCFF seems adequate to cover capital
expenditures. The FCFF, in part, can be used to make dividend payments to the company’s
shareholders. Moreover, since the company has high investments in fixed capital and working
capital, it will have a low FCFE and pay high dividends.
As noticed, the company’s profitability is increasing and generating high returns, and under such a
case the company would increase its net new investment in operating assets to compete in the
sector. The debt financing accompanying the new investments may also increase. While the
terminal value will stand as $45.59 at the year 6, the estimated equity value will be $42.1 with a
return rate of %13.79. Since the intrinsic value of the shares ($30.29) is slightly lower than the
current share price ($31.81), the Intel shares are slightly overvalued. An estimated equity value of
$42.1 also supports this argument
5.1.6. Residual Income Valuation
In the Residual Income Model (RIM) of valuation, the intrinsic value of the firm has two components:
- The current book value of equity, plus
- The present value of future residual income This can be expressed algebraically as;

27 | P a g e
Where;
B0 is the current book value of equity,
Bt is the book value of equity at time t,
RIt is the residual income in future periods,
r is the required rate of return on equity,
Et = net income during period t,
RIt = Et – rBt-1.
The formula simply says the value of common stock is equal to the book value of equity plus the
discounted stream of future residual income, where the discount rate is the required return on
common equity.
0 0
1
1
0 0
1
RI
(1 )
(1 )





 


 



t
t
t
t t
t
t
V B
r
E rB
V B
r

28 | P a g e
Book value per share is initially $ 2.74. Based on an ROE forecast of 12.36 percent, the ending
book value would be $ 9.18 at the end of the 5 year since the dividends are paid. The dividend
growth rate is derived from www.stocks-on-net.analysis.com for the INTC shares. The intrinsic
value of the share price would be $38.57 in year 5, which correspond to a 20 percent increase. We
can argue that INTC shares are undervalued because its ROE exceeds its cost of equity, which is
9.9%. The results indicate that the Intel earned enough to cover the cost of equity capital. As a
result, it has positive residual income and it is profitable both in accounting and economic sense.
The cost of equity here is calculated as;
Cost of Equity = (dividends per share/current market value of the stock)/growth rate of dividends
5.1.7. Multiple Market Ratios
A valuation multiple is simply an expression of market value relative to a key statistic that is
assumed to relate to that value. To be useful, that statistic – whether earnings, cash flow or some
other measure – must bear a logical relationship to the market value observed; to be seen, in fact,
as the driver of that market value. There are two basic types of multiple – enterprise value and
equity. The most common equity valuation approach involves examining ratios between an equity's
market price and an element of the underlying company's performance, whether that be earnings,
sales, book value, or something similar (UBS Warburg, 2001). In this study, I used equity multiple
market ratios.
Market multiplies can be robust tools that provide useful information about relative value (UBS
Warburg, 2001). They are simple to use, and easy use of the multiplies and their wide availability
make them an appealing method for assessing value. On the other hand, they have several
disadvantages. They do not allow to disaggregate the effect of different value drivers and do not
fully capture the dynamic nature of business and competition. They are also difficult to compare as
they differ for many reasons, not all relating to true differences in value.
The valuation is performed using the Market Multiplies as based on 10 June 2015 actual market
data appeared in the Morningstar for the Intel Company (INTC).
Forward P/E based on the current fiscal year
P/E= Stock Price/Earnings per Share (EPS)
P/E= 31.81/2.43
P/E= 13.09
Price to Sales (P/S)
P/S= Share Price/Sales per Share
P/S=31.81/15.90
P/S=2.8
Price to Book Value (P/BV)
P/BV= Price/Book Value per Share (PVPS)
P/BV= 31.81/11.58
P/BV= 2.74

29 | P a g e
Price to Operating Profit (P/OP)
Given:
Share: 4,736 million
Operating Income=15,347 million
Then,
Operating Profit per share= 3.24
Share Price=31.81
P/OP= Share Price/Operating Share per Share
P/OP=31.81/3.24
P/OP= 9.81
Price to FCFE (P/FCFE)
Number of Shares= 4,376 million
FCFE= 10,456
FCFE/Share= 2.21
Current Share (P)= 31.81
P/FCFE= 31.81/2.21
P/FCFE= 14.39
Price to Dividends (D/P)
D/P= Annual Dividend/Stock Price per Share
D/P= 0.90/31.81
D/P= % 2.82
Other EV Multiples
EV/EBITDA
Given Data in Actual Figures from the Intel Reports:
Short-term debt: 1,604
Long-term debt: 12,107
Short-term Investment: 11,493
Cash & Cash Equivalency: 2,561
Trading Assets: 4,446
Total Equity= Stock price X Number of shares
Total Equity: 31.81 x 4,736,000
Total Equity: 150,652,000
EV= 144,347
EBITDA= 23,896
EV/EBITDA= 6.04
EV/FCFF
Given the actual data;
EV= 144,347
FCFF=10,221
Then,
EV/FCFF= 14.12
Comments about the Results of the Multiple Market Ratios
- The calculated P/E ratio is 13.09. This is 75.28% lower than that of the Technology sector,
and 82.99% lower than that of Semiconductor - Broad Line industry.
- Based on our analysis, the price to book indicator of Intel Corporation is roughly 2.91 times.
This low P/BV ratio generally implies that the firm is undervalued; it is often a good indicator
that the company may be in financial or managerial distress.

30 | P a g e
- Price to Sales ratio (P/S) FOR Intel is 2.8. This ratio is typically used for valuing equity
relative to its own past performance as well as to performance of other companies or
market indexes. In most cases, the lower the ratio the better it is for investors. Therefore,
the low P/S ratio puts the Intel in a very good position in terms of value of its equity.
- The company’s forward P/E based on the 2014 fiscal year is 12.90. It is slightly higher than
the higher than its trailing P/E but lower than the S&P 500's forward P/E of 15.20. Investors
therefore see more value in the company's future earnings but not as much as they see in
the market in general.
- EV/EBITDA is 6.04, which is lower than its benchmarks (for example Technology has 10.19
value). Therefore, the company is relatively undervalued.
5.2. Texas Instruments (TXN)
Both absolute and relative stock valuation models are also applied to the TXN shares. The resulting
tables and explanations are presented below.
5.2.1. DDM Value with a Single Holding Period
If an investor wishes to buy a share of stock of Texas Instrument (TXN) and hold it for one year, the
value of that share of stock today would be V0 = $49.64. The expected share price of $56.39 is
nearly %12 higher than this figure. A 12 percent profit during one year period can be considered a
wise investment. It is possible to argue that the TXN stock seems attractively priced today given the
forecast of next year’s price

31 | P a g e
5.2.2. Two-Stage DDM Valuation
In this case, we assume that the TXN shares experience 11 percent growth rates for a short period
of time before settling in on a lower but stable perpetual growth rate. At the end of the 5-year, the
TXN stock price is expected to be nearly $65, almost $8 above the intrinsic value.
The market price of the TXN shares is $51.80 as of June 10, 2015. In other words, the market price
of the company’s share is lower than the calculated value using the model; this means the stock
price is undervalued which could mean that our estimates of the growth of the company is higher
than what market perceives. It can also be interpreted that the TI needs to revise the growth
estimates of its shares in order to align the model value closer to the market price of the stock; this
is called the implied growth rate. Since the market stock price is marginally lower than the model
price, one could assume the stock price trading cheaper and can be a good investment to make.
It however should be noted that this type of model has its usage and applicability limited to
companies which have higher growth rates during 1st
phase which is known and having stable
growth rates thereafter. Also the growth rates in 1st
phase should be closer to growth rates in stage
two, so essentially if there is not much difference between the two stages; is when the model will
yield appropriate results.

32 | P a g e
5.2.3. Gordon Growth Model (GGM)
The current market price of $51.80, or approximately 8 percent, more than the GGM’s intrinsic value
estimate of $55.43. TXN shares appear to be slightly overvalued, based on the Gordon growth
model estimate. Moreover, as the estimated value is a bit higher than the market price, the
expected growth rate may be too high for a stable firm like Texas Instruments. The valuation here
also should be interpreted with caution as biggest drawback to the Gordon Growth Model is that it
assumes a constant dividend growth rate. On the other hand, considering the market value of
$49.03 on July 27, 2015, the TXN shares seem to be overvalued based on the GGM.
5.2.4. FCFF and FCFE Models
For the valuation, following inputs from the Morningstar Investment Report for the Texas
Instruments were used, and some assumptions were made when necessary.
• Sales are $13,045 million
• Sales will grow at 12% annually for five years, and then at 5% annually thereafter
• EBIT is 3,874 million and is %29.6 of the sales
• Interest expense is $192 million and will increase proportionately with sales
• Depreciation expense is $850 million and will increase proportionately with sales
• Gross investment in plant and equip will be 40% of the increase in sales
• New investment in working capital will be 2,342 million and will increase 5 percent each year
• The corporate income tax rate is 27.18%
• The before - tax cost of long-term debt is 5.0%
• The equity beta is 1.22, risk-free rate is 2.0%, and equity risk premium is 6%
• There are 1,040 million outstanding shares

34 | P a g e
Given the results above, Texas Instruments can use free cash flows to manage its capital structure
to finance its new investments and borrowings. The FCFF seems adequate to cover capital
expenditures. The FCFF, in part, can be used to make dividend payments to the company’s
shareholders. Moreover, since the company has high investments in fixed capital and working
capital, it will have a low FCFE and pay high dividends.
As noticed, the company’s profitability is increasing and generating high returns, and under such a
case the company would increase its net new investment in operating assets to compete in the
sector. The debt financing accompanying the new investments may also increase. While the
terminal value will stand as $63.37 at the year 6, the estimated equity value will be $59.03 with a
return rate of %16.23. Since the intrinsic value of the shares ($52.50) is slightly higher than the
current share price ($49.03), the Intel shares are slightly undervalued. An estimated equity value of
$59.03 also supports this argument. In other words, if Intel could lower their cost of equity the share
price would rise closer to the current market value.
5.2.5. Residual Income Model (RIM)

35 | P a g e
Book value per share is initially $ 5.43. Based on an ROE forecast of 16.29 percent, the ending
book value would be $ 11.91 at the end of the 5 year since the dividends are paid. The dividend
growth rate is derived from (www.stocks-on-net.analysis.com) for the TXN shares. The intrinsic
value of the share price would be $60.65 in year 5, which correspond to a 17 percent increase. We
can argue that the company was undervalued because its ROE exceeds its cost of equity (14.22%).
The results indicate that the Intel earned enough to cover the cost of equity capital. As a result, it
has positive residual income and it is profitable both in accounting and economic sense.
5.2.6. Multiple Market Ratios
The valuation is performed using the Market Multiplies as based on 10 June 2015 actual market
data appeared in the Morningstar for Texas Instruments (TXN) shares.
Forward P/E based on the current fiscal year
P/E= Stock Price/Earnings per Share (EPS)
P/E= 54.08/2.57
P/E= 21.04
Price to Sales (P/S)
P/S= Share Price/Sales per Share
P/S=54.08/12.57
P/S= 4.3
Price to Book Value (P/BV)
P/BV= Price/Book Value per Share (PVPS)
P/BV= 54.08/10.2
P/BV= 5.3
Price to Operating Profit (P/OP)
Given:
Share: 1,040 million
Operating Income= 3,947 million
Then,
Operating Profit per share= 3.79
Share Price=54.08
P/OP= Share Price/Operating Share per Share
P/OP=54.08/3.79
P/OP= 14.26
Price to FCFE (P/FCFE)
Number of Shares= 1,040 million
FCFE= 3,581
FCFE/Share= 3.44
Current Share (P) = 54.08
P/FCFE= 54.08/3.44
P/FCFE= 15.72
Price to Dividends (D/P)
D/P= Annual Dividend/Stock Price per Share
D/P= 1.24/54.08
D/P= % 2.3

36 | P a g e
Other EV Multiples
EV/EBITDA
EV= (Total Equity + Debt) – (Cash and Cash Equivalents) – (Short term investments)
EV= 55,994 – 1,199 -2,342
EV= 52,453
EBITDA= 5,198
EV/EBITDA= 52,453 /5,198
EV/EBITDA= 10.09
EV/FCFF
Given the actual data;
EV= 52,453
FCFF= 3,581
Then,
EV/FCFF= 14.64
Summary Table of the Market Multiplies and relevance to the Industry
Market Multipliers Intel (INTC) Texas Instruments (TXN) Industry Average
P/E 13.09 21.04 21.1
P/S 2.80 4.30 3.20
P/BV 2.74 5.30 4.27
P/OP 9.81 14.26 15.20
P/FCFE 14.39 15.72 13.95
D/P (%) 2.82 2.30 -
EV/EBITDA 6.04 10.39 10.56
EV/FCFF 14.12 14.64 15.39
- The calculated P/E ratio is 21.04. This figure almost approximates the P/E ratio of the
industrial average.
- Based on our analysis, the price to book indicator of Intel Corporation is roughly 5.3 times.
This figure is higher than that of the industrial average. The high P/BV ratio generally
implies that the firm is overvalued, but it does not indicate that the company is in financial or
managerial distress.
- Price to Sales ratio (P/S) for the TXN is 4.3. This ratio is typically used for valuing equity
market indexes. In most cases, the lower the ratio the better it is for investors, but the P/S
ratio of the TXN is higher than both those of the INTC and the industrial average. Therefore,
the relatively high P/S ratio puts the TXN in a questionable position in terms of value of its
equity.
- The company’s forward P/E based on the 2014 fiscal year is 17.69. This figure is slightly
higher than its trailing P/E (17.43) and the S&P 500's forward P/E of 15.20. Investors

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therefore see less value in the company's future earnings but not as much as they see in
the market in general.
- EV/EBITDA is 10.39, which nearly approximate its benchmarks (for example the Industry
has 10.56 value). Therefore, the company is relatively overvalued.
6. JUDGEMENT OF THE VALUATION RESULTS
6.1. INTEL CORPORATIONS SHARES (INTC)
In this report, a number of methods were used for the valuation of the Intel Corporation’s based on
its current and historical financial statements.
 As a general comment based on the company’s financial statements, we can state that Intel
Corp.'s net revenue, operation income, income before taxes, and net income declined from
2012 to 2013 but then increased from 2013 to 2014.
 With the current data, return for equity of Intel is 20.51%. For most industries Return on
Equity between 10% and 30% are considered desirable to provide dividends to owners and
have funds for future growth of the company.
 Intel’s return on asset is currently 12.70% (as of December 2014). A low ROA typically
means that a company is asset-intensive and therefore will needs more money to continue
generating revenue in the future.
 The calculated P/E ratio is 13.09. This is almost 75% lower than that of the Technology
sector, and 82% lower than that of Semiconductor - Broad Line industry.
 Based on our analysis, the price to book indicator of Intel Corporation is roughly 2.74 times.
This low P/BV ratio generally implies that the firm is undervalued. A ratio of 2.91 (bigger
than 1.0) indicates that the firm is creating value for its stockholders.
 Price to Sales ratio (P/S) for Intel is 2.91. This ratio is typically used for valuing equity
market indexes. In most cases, the lower the ratio the better it is for investors. Therefore,
the low P/S ratio puts the Intel in a very good position in terms of value of its equity. But on
the other hand, the low P/S ratio indicates a sluggish sales growth. This price is small
because Intel has a significantly higher amount of shares outstanding than its competitors,
while increasing the Price/Sales ratio.
 The company’s forward P/E (based on the December 2014) is %12.90. It is slightly higher
than its trailing P/E but lower than the S&P 500's forward P/E of 15.20. Current P/E ratio
stands as %11.88. Investors therefore can see more value in the company's future earnings
but not as much as they see in the market in general.
 From a value perspective, we look at how much bigger the company's market capitalization
is than its latest operating profits after subtracting taxes. By this measure Intel Corporation
is priced very attractively with a total value of $156.38 billion, only 7.72 times higher than its
latest quarterly net income plus depreciation.

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 Intel’s EBITDA is around 23.9 billion, which puts the company in a top position among
related companies in the sector.
 The market price of $32.46, or approximately 8 percent, more than the Gordon growth
model intrinsic value estimate of $30.11. The Intel Corporation appears to be overvalued,
based on the Gordon growth model estimate, but this figure should be interpreted with
caution due to inherent assumptions in the GGM.
 The FCFF seems adequate to cover capital expenditures. The FCFF, in part, can be used
to make dividend payments to the company’s shareholders. Moreover, since the company
has high investments in fixed capital and working capital, it will have a low FCFE and pay
high dividends. While the terminal value will stand as $34.94 at the year 6, the estimated
equity value will be $42.1 with a return rate of 2.55%. Since the intrinsic value of the shares
($34.83) is slightly higher than the current share price ($32.47), the Intel shares are slightly
undervalued. On the other hand, using the $42.1 estimated equity value. Intel (INTC)
shares are overvalued. In other words, if the Intel could lower their cost of equity the share
price would rise closer to the current market value.
4.2. TEXAS INSTRUMENTS SHARES (TXN)
 As a general comment based on the company’s financial statements, we can argue that
financial figures are indicating a healthy growth of the company in recent years. Net
revenue, operation income, income before taxes, and net income have been on rise since
2013.
 As indicated in Morningstar report data published in June 10, 2015, return for equity (ROE)
of the TXN shares is 26.62%. For most industries Return on Equity between 10% and 30%
are considered desirable to provide dividends to owners and have funds for future growth of
the company. The industry ROE was 10.2% (as of June 10, 2015), much below the TXN
figure.
 TXN’s return on asset is currently 15.39% (Morningstar Report of June 10 2015). It is not a
quite high figure but still above that of the INTC. The company is not very asset-intensive
but still needs more money to continue generating revenue in the future.
 The calculated P/E ratio is 21.04. This figure almost approximates the industry average and
is well above that of the INTC.
 Based on our analysis, the price to book indicator of Intel Corporation is roughly 5.3 times.
This high P/BV ratio generally implies that the firm is overvalued. A ratio of 2.91 (bigger
than 1.0) indicates that the firm is creating value for its stockholders.
 Price to Sales ratio (P/S) for the TXN is 4.3. This ratio is typically used for valuing equity
market indexes. In most cases, the lower the ratio the better it is for investors. Even though
the high P/S ratio does not put the Intel in a very good position in terms of value of its
equity, it indicates a rapid sales growth. This price is relatively higher because the TXN has
a relatively lower amount of shares outstanding than its competitors.

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 The company’s forward P/E based on the 2014 fiscal year is 17.69. It is higher than both its
trailing P/E and the S&P 500's forward P/E of 15.20. Investors therefore see more value in
the company's future earnings but not as much as they see in the market in general.
 Intel Corporation's stock is inexpensive relative to "optimum" P/E ratio of 15.27, the level
that could be justified by the company's EPS growth rate.
 Texas Instrument’s EBITDA is around 5.2 billion, which puts the company in a top position
among related companies in the sector after the Intel and Taiwan Semiconductor
Manufacturing Companies.
 The current market price of $49.03 (24 July 2015), or approximately 10 percent, less than
the Gordon growth model intrinsic value estimate of $55.43. The Intel Corporation appears
to be undervalued, based on the Gordon growth model estimate.
 The FCFF seems adequate to cover capital expenditures. The FCFF, in part, can be used
to make dividend payments to the company’s shareholders. Moreover, since the company
has high investments in fixed capital and working capital, it will have a low FCFE and pay
high dividends. While the terminal value will stand as $63.37 at the year 6, the estimated
equity value will be $59.03 with a return rate of %13.79. Since the intrinsic value of the
shares ($52.50) is slightly higher than the current share price ($49.03 – July 24, 2015), the
TXN shares are slightly overvalued. This conclusion is also supported by the estimated
equity value of $59.03. In other words, if Texas Instruments could lower their cost of equity
the share price would rise closer to the current market value.
7. FUTURE OUTLOOK & RECOMENDATIONS
Semiconductor manufacturing is inherently capital-intensive sector, and therefore it requires
methodical planning and implementation to keep the production cost at a reasonable level to be
cost effective and competitive. Intel accomplished cost-effective chip manufacturing through
investments in the latest process equipment technologies. Intel’s lead in process technology
benefits from considerable R&D expenses (20% of revenue on average) and this rate must continue
to uphold its advantage. The analysts argue that there needs to be strong demand via diversified
products that can be sold at high margins. Intel achieved high revenue with its massive research
and development budget that averaged $10.7 billion annually from 2012 to 2014.
I feel that despite the fact that Intel shares have fluctuating trends in recent months, it still keeps a
buy position. Although investors worry about the mixed growth record based on the Company's
recent reports, Intel Corporation still has strengths in several areas, such as its revenue growth,
largely solid financial position with reasonable debt levels by most measures, notable return on
equity, reasonable valuation levels and solid stock price performance. Stock analysis reports
indicate that Intel shares are now ranked to be market performers in the year ahead (Alan, 2015).
Intel stock has lost substantial value over the past three months since April 2015. While downward
pressure may persist in the PC industry, if they decide to buy, investors may be rewarded with
above-average total returns out to 2018-2020, with solid dividend advantages.

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Meanwhile, Intel management is taking right moves to allow Intel to maintain its dominant position in
computer processors in recent years. It has made considerable effort to break into smartphone and
tablet processors, which has traditionally been the stronghold of ARM, and even paid $1.4 billion to
acquire Infineon's wireless connectivity chip business in 2011 to support the endeavor. In addition,
Intel acquired antivirus and security software maker McAfee for $6.7 billion in 2011, with the vision
of adding security features to its chips and hardware. Just recently, Intel Corp. agreed to buy Altera
Corp. for $16.7 billion to defend its presence in data centers, forging a deal that will add to a record
year for industry consolidation (Bloomberg, 2015). Intel said in the statement. “The combination is
expected to enable new classes of products that meet customer needs in the data center and
Internet of Things market segments” (Bloomberg, 2015).
Since the start of 2008, Intel's annual revenue has increased by 59% while adjusted earnings nearly
tripled. During the same period, fellow sector Texas Instruments (TI) doubled its earnings on 25%
higher sales, trailing far behind Intel on both counts. Intel's only serious head-to-head rival in the PC
chip market, Advanced Micro Devices (NASDAQ:AMD), saw sales fall 5% while its earnings stayed
firmly in the red (source: www.fool.com). The analysts think that Intel is poised to start building a
higher current ratio again. The company has been investing heavily in new manufacturing facilities
in recent years, sacrificing dividend growth and strong cash balances for a toehold in the mobile
chip market. INTC's debt-to-equity ratio is very low at 0.24 and is currently below that of the industry
average, implying that there has been very successful management of debt levels
(ww.thestreet.com). Compared to other companies in the Semiconductors & Semiconductor
Equipment industry and the overall market, INTEL CORP's return on equity exceeds that of both the
industry average and the S&P 500.
Some analysts think that price target for the INTC should be lowered from $36 to $30 and
recommend the current shares to hold (www.seekingalpha.com). They think that the stock might
recover following the investor meeting in Q4 of 2015. Actually there are a number of issues that
worry the analysts regarding the INTC. Recent acquisitions that weren't popular among the
shareholder ranks, contraction in the PC market in 2015, slow growth in the enterprise segment and
mobile were among them. They also think that the EPS figures of the INTC could perform slightly
better if in the event Intel is able to close the Altera deal prior to year-end, and is able to combine
Altera earnings with Intel earnings. The analyst forecast EPS range to be $2.32 to $2.41 and price
target range as $29.95 to $31.10 for the next year.
On the other hand, a report appeared in Investopedia in May 2015 warns investors about the Intel
stocks, arguing that the stocks may fall due to several reasons. First is the weak PC market. Intel
managed to grow its PC chip unit volume by 6% year over year during the first quarter, the average
selling price of its PC chips declined by 13%. Secondly a refocused AMD could increase its market
share as it AMD plans to launch products based on a completely new core called Zen. Lastly,

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competition in servers may force Intel to cut its prices to fend off this competition with IBM, and its
stock price may decline as a result.
Despite all those facts, it is my view that Intel (INTC) is a great stock to buy due to the recovering
PC market. Even though the mobile growth is still a worry, Intel is still poised to be a portfolio and is
also attractively priced.
With respect to the Texas Instruments, both economic and financial indicators are promising a
bright outlook. The reports indicate that considering the strong earnings growth of 45.45% and other
important driving factors, TXN shares have surged by 36.15% over the past year, outperforming the
rise in the S&P 500 Index during the same period (TheStreet, 2015). The net income growth
(36.6%) from the same quarter one year ago has significantly exceeded that of the S&P 500 and
the Semiconductors & Semiconductor Equipment industry. When compared to other companies in
the Semiconductors & Semiconductor Equipment industry and the overall market, TI’s return on
equity exceeds that of both the industry average and the S&P 500. Despite currently having a low
debt-to-equity ratio of 0.52, it is higher than that of the industry average. Despite the fact that TXN's
debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.67 is high and
demonstrates strong liquidity. Texas Instruments has improved earnings per share by 45.5% in the
most recent quarter compared to the same quarter a year ago. Although the company has reported
somewhat volatile earnings recently, it is poised for EPS growth in the coming year. During the past
fiscal year, TI reported lower earnings of $1.50 versus $1.87 in the prior year. This year, the market
expects an improvement in earnings ($1.72 versus $1.50).
As of July 27, 2015, the TXN shares stand at $49.03. I think it is a good time for the investors to
move forward and buy since the TXN shares have come to reasonable levels. Those who have
already invested in the TXN shares should hold their shares, and it is certainly not a good time to
sell their shares. In other words, the TXN stock seems attractively priced today given the forecast of
next year’s price. Actually, these types of recommendations based on the valuation are a bit
subjective and time-variant. For example, considering the TXN share prices in June 10, 2015 when
the Morningstar Investment Report is published, the shares were not attractive to buy based on the
valuation reports which indicated overvaluation. The analysts also raised their value estimate for the
TXN to $54 per share from $52, based solely on an adjustment to their cost of equity assumptions.
Yahoo Finance expects $55.0 per share by the next year. Also 1% revenue decline for TI shares in
2015 is expected. In the longer-term, average annual revenue growth of 4% per year from 2016 to
2019 is expected. Even though the analog chip growth is expected at 5% per year over the next five
years, it is expected that the firm's other segment will decline in the long term and lessen the TI’s
total revenue growth. Many analysts, however, are positive on TXN shares given the firm is building
competitive advantages with its leading analog market share, 300 mm manufacturing strategy,
counter-cyclical capacity investments, unmatched manufacturing and product development scale,
large sales force and portfolio cross-selling capabilities (http://www.cheatsheet.com/stocks/7-

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important-stock-recommendations-of-big-banking-analysts). They feel these strengths outweigh the
fact that the company shows weak operating cash flow.
I think that TI can be a solid choice for value investors looking for good dividend payouts over the
next few years. However, investors should pay attention R&D spending and innovations of the
company as a future challenges that may affect their portfolio.
REFERENCES
Hitchner J.R (2003). Financial Valuation, Applications and Models 3rd
Edition, Wiley Finance
House, A.G. (2015). Intel NDQ-INTC Research Report, Value Line Publishing LLC.
Investopedia (2015). Relative Valuation Models. Retrieved from
http://www.investopedia.com/terms/r/relative-valuation-model.asp
Jackson, M. and Staunton, M.(2001). Advanced Modeling in Finance using Excel and VBA. John
Wiley & Sons, Ltd, Chichester, West Sussex PO19 1UD, England
Jordan, B.,Miller, T., and Dolvin, D. (2011). Fundamentals of Investments with Stock-Trak Card 6th
edition, McGraw-Hill Higher Education, ISBN: 0077457641
Morningstar (2015a) INTC Morningstar Investment Details Report - 10 June 2015. Retrieved from
http://www.morningstar.com/stocks/XNAS/INTC/
Morningstar (2015b).TXN Morningstar Investment Details Report (10 June 2015). Retrieved from
http://www.morningstar.com/stocks/XNAS/TXN/
Pinto, J.E., Henry, E., Robinson, T.R, and Stowe, J.D. (2010).Equity Asset Valuation, John Wiley &
Sons, Inc., 2nd
Edition, ISBN-13 9780471571439
Pratt, S.P (2008). Valuing a Business, 5th
Edition: The Analysis and Appraisal of Closely Held
Companies (McGraw-Hill Library of Investment and Finance) 5th Edition
Texas Instruments (2015). 2014 Annual Report. Notice of 2015 Annual Meeting & Proxy Statement.
Texas Instruments Incorporated, Dallas, TX
TheStreet(2015). The Street Quant Rating Report for the TXN Shares, Wall Street, New York, USA
Trugman, G.R (2012). Understanding Business Valuation: A Practical Guide to Valuing Small to
Medium Sized Businesses, Fourth Edition, 2012
UBS Warburg (2001). Valuation Multiples: A Primer, Global Equity Research, London, UK.
Zwilling, Martin (2009). How to value a young company, Forbes
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http://www.bloomberg.com/news/articles/2015-06-01/intel-buys-altera-for-16-7-billion-as-chip-deals-
accelerate
http://cfatutor.me/2013/07/08/dividend-discount-model-ddm/

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http://www.cfainstitute.org/learning/products/publications/inv/Pages/investments_lecture_kit.aspx
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http://ycharts.com/companies/TXN

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APPENDIX
This Appendix has ten years of financial statements and other financial information for Intel
Corporation and Texas Instruments. The data are derived mainly from Morningstar, NASDAQ
Company Reports, and Yahoo Finance. Additional financial ratios, closing stock prices
(adjusted for dividends) are also included from January 2000 to June 2015. The adjusted
stock prices are obtained from Yahoo Finance.

Research Paper_Stock Valution

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