INTC Intel Corporation Sector: Information Technology TRIMIntel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. The company operates

Applied Portfolio Management Analysts: Ashley Brecheisen, Stevi Schultz

Report Date: 5/6/2013

Market Cap (mm) $103,018 Annual Dividend $0.89 2-Yr Beta (S&P 500 Index) 0.98

Return on Capital 30.3% Dividend Yield 4.3% Annualized Alpha -26.9% Compared With:

EPS (ttm) $2.07 Price/Earnings (ttm) 10.0 Institutional Ownership 5.6% QUALCOMM Incorporated

Current Price $20.62 Economic Value-Added (ttm) $7,876 Short Interest (% of Shares) 4.8% Samsung Electronics Co. Ltd.

12-mo. Target Price $23.00 Free Cash Flow Margin 13.2% Days to Cover Short 5.4 and the S&P 500 Index

Business Description

Total Revenue 14.9% Free Cash Flow -32.8%

EBIT 19.2% Total Invested Capital 21.8%

NOPAT 17.9% Total Assets 16.7%

Earnings Per Share 41.0% Economic Value-Added 16.5%

Dividends Per Share 15.8% Market Value-Added -10.2%

2008 2009 2010 2011 2012

25.7% 24.6% 35.7% 32.4% 27.4%

15.2% 18.9% 26.3% 18.8% 13.2%

6.4% 3.9% 9.8% 10.2% 10.7%3.7% 2.7% 3.0% 3.2% 4.2%

2008 2009 2010 2011 2012

0.93 0.79 2.06 2.46 2.20

0.55 0.56 0.63 0.78 0.87

1.17 1.19 2.15 2.42 2.171.52 1.30 1.80 1.39 0.44

Datasource: Capital IQ

Margins and Yields

Operating Margin

Per Share Metrics

Earnings

NOPATFree Cash Flow

Dividends

Free Cash Flow Margin

Earnings YieldDividend Yield

Intel Corporation designs, manufactures, and sells integrated digital

technology platforms worldwide. The company operates through PC Client

Group, Data Center Group, Other Intel Architecture, Software and

Services, and All Other segments. It offers microprocessors that process

system data and controls other devices in the system; and chipsets, which

sends data between the microprocessor and input, display, and storage

devices, such as keyboard, mouse, monitor, hard drive or solid-state drive,

and optical disc drives; system-on-chip products that integrate its

processing functions with other system components, including graphics,

audio, and video onto a single chip; wired network connectivity products; Investment Thesis

ANNUALIZED 3-YEAR CAGR

We recommend trimming exposure to MSFT & INTC due to poor positioning of

both companies. INTC and MSFT have adequate dividend yields and MSFT has

high profit margins. However, 2012 performance was weak due to the decline

in PC sales (14% yoy). The unpopularity of MSFT’s Windows 8 has been a

significant factor in the PC sales decline. Consumer demand is moving away

from PCs and toward mobile devices. INTC/MSFT have been late to adapt to

this demand shift. Consequently, MSFT’s Windows, Online Services,

Entertainment and Devices and Business Segments and INTC's processor-based

revenue stream face growth challenges. Our recommendation to trim the

Wintel position comes in conjunction with our colleague, Brea Short’s,

recommendation to buy a Wintel competitor, Qualcomm. These portfolio

changes will increase our IT exposure to an overweight position, and add a

mobile and growth-oriented stock to our portfolio.

Intel Corporation Sector: Information Technology TRIMINTC

-40%

-30%

-20%

-10%

0%

10%

20%INTC ^SPX

-40%

-30%

-20%

-10%

0%

10%

20%

30%INTC QCOM Samsung

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012

Price/Earnings Price/Free Cash Flow

$0

$5,000

$10,000

$15,000

$20,000

2007 2008 2009 2010 2011 2012

EBIT Net Operating Profit After Tax

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2007 2008 2009 2010 2011 2012

Economic Value-Added Market Valued-Added

0%

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012

ROA ROE ROIC

Applied Portfolio Management Analysts: Ashley Brecheisen, Stevi Schultz

Report Date: 5/6/2013

Market Cap (mm) $224,255 Annual Dividend $0.89 2-Yr Beta (S&P 500 Index) 0.84

Return on Capital 88.5% Dividend Yield 3.3% Annualized Alpha -6.9% Compared With:

EPS (ttm) $1.96 Price/Earnings (ttm) 13.7 Institutional Ownership 5.3% QUALCOMM Incorporated

Current Price $26.71 Economic Value-Added (ttm) $19,365 Short Interest (% of Shares) 1.3% Intel Corporation

12-mo. Target Price $32.50 Free Cash Flow Margin 39.8% Days to Cover Short 0.0 and the S&P 500 Index

Business Description

Total Revenue 8.1% Free Cash Flow 5.1%

EBIT 10.5% Total Invested Capital 8.1%

NOPAT 11.9% Total Assets 15.9%

Earnings Per Share 7.5% Economic Value-Added 12.3%

Dividends Per Share 15.4% Market Value-Added -12.2%

2008 2009 2010 2011 2012

39.8% 35.4% 38.6% 38.8% 37.9%

30.5% 27.2% 35.4% 35.2% 39.8%

9.8% 5.3% 7.6% 10.5% 7.6%2.3% 1.7% 1.9% 2.5% 3.0%

2008 2009 2010 2011 2012

1.90 1.63 2.13 2.73 2.02

0.44 0.52 0.52 0.64 0.80

1.92 1.70 2.01 2.64 2.541.18 2.28 1.95 1.84 2.81

Datasource: Capital IQ

Microsoft Corporation Sector: Information Technology TRIMMSFT

Microsoft Corporation develops, licenses, and supports software products

and services; and designs and sells hardware worldwide. The company’s

Windows & Windows Live division offers PC operating system that

primarily includes Windows 7 operating system, Windows live suite of

applications and Web services, and PC hardware products. Its Server and

Tools division provides Windows Server operating systems, Windows

Azure; Microsoft SQL Server, SQL Azure, Windows Intune, Windows

Embedded, Visual Studio, Silverlight, system center products, Microsoft

consulting services, and Premier product support services. This division

also offers cloud-based services; and training and certification to Investment Thesis

ANNUALIZED 3-YEAR CAGR

We recommend trimming exposure to MSFT & INTC due to poor positioning of

both companies. INTC and MSFT have adequate dividend yields and MSFT has

high profit margins. However, 2012 performance was weak due to the decline

in PC sales (14% yoy). The unpopularity of MSFT’s Windows 8 has been a

significant factor in the PC sales decline. Consumer demand is moving away

from PCs and toward mobile devices. INTC/MSFT have been late to adapt to

this demand shift. Consequently, MSFT’s Windows, Online Services,

Entertainment and Devices and Business Segments and INTC's processor-based

revenue stream face growth challenges. Our recommendation to trim the

Wintel position comes in conjunction with our colleague, Brea Short’s,

recommendation to buy a Wintel competitor, Qualcomm. These portfolio

changes will increase our IT exposure to an overweight position, and add a

mobile and growth-oriented stock to our portfolio.

Margins and Yields

Operating Margin

Per Share Metrics

Earnings

NOPATFree Cash Flow

Dividends

Free Cash Flow Margin

Earnings YieldDividend Yield

-20%

-15%

-10%

-5%

0%

5%

10%

15%MSFT ^SPX

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%MSFT QCOM INTC

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012

Price/Earnings Price/Free Cash Flow

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2007 2008 2009 2010 2011 2012

EBIT Net Operating Profit After Tax

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2007 2008 2009 2010 2011 2012


0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012

ROA ROE ROIC

Intel Corporation (NasdaqGS: INTC)

Microsoft Corporation (NasdaqGS: MSFT)

3 | P a g e Analysts: Ashley Brecheisen, Stevi Schultz

Recommendation: Trim Sector: Technology Sub-Sector: Systems Software/Semiconductors

Investment Thesis

We recommend trimming the Wintel position (Intel and Microsoft) due to poor positioning of both companies. INTC

and MSFT have moderate to high dividend yields and MSFT shows efficiency through high margins. However, the 2012

financials of both companies were weak due to the decline in PC sales. According to IDC, the year‐over‐year decline in

PC sales is 14%. The unpopularity of MSFT’s Windows 8 has been a significant factor in the PC sales decline. Studies

indicate consumer demand is moving away from PCs and toward mobile devices. INTC/MSFT have been late to adapt to

this demand shift. Consequently, MSFT’s Windows, Online Services, Entertainment and Devices and Business Segments

have struggled to expand segment revenue percentages. Likewise, this decline in demand has hampered revenue

growth for INTC. Wintel’s failure to expand into mobile segments is a threat to their ability to maintain dividend yields.

Our recommendation to trim the Wintel position comes in conjunction with our colleague, Brea Short’s,

recommendation to buy a Wintel competitor, Qualcomm. All three companies are good EVA generators with un‐priced

value creation that we hope to capture. This collaborative portfolio position change will diversify our IT sector holdings,

increase our IT exposure to an overweight position, and add Qualcomm, a mobile and growth oriented stock, to our

portfolio.

Macroeconomic Thesis

The lagging and coincident indicator rating scale shown in

the graph confirms that the US economy has been in an

expansionary mode. The leading indicator ranking scale

suggests that economic activity will slow in the first half of

2013. ISM new manufacturing orders and consumer

sentiment have been on a decline since coming out of the

2008 recession, which impacts both INTC and MSFT.

The economy is entering a slowing phase –

whether it is a mid‐cycle slowdown or

beginning of a recession remains to be

determined – which means we are just past

the peak of the financial cycle.




SIF Purchase versus Current Trim

INTC was added to the SIF in 2008.

2013

INTC is undervalued, although we do not expect a significant rise in price.

INTC has an attractive dividend yield, however.

INTC processors competition is stronger.

PC market is declining with limited growth opportunities as consumers migrate away from the PC toward mobile devices.

INTC's chips not suitable for many smaller, mobile devices.

Moving into the mobile market late would require a large catalyst.

2008

The majority of stocks were appealing because of their undervaluation which was a result of the recession. Their stock prices were expected to rise.

INTC processors were perceived as the best in the industry.

PC market had positive outlook.




MSFT was added to the SIF in 2012.

2012

Strong financial measures.

High expectations for

Windows 8.

PC dominated sector sales.

2013

Financial measures suffer

from low PC sales.

YoY PC sales decline is

expected.

Windows 8 is unpopular.

MSFT’s Windows, Online

Services, Business Segment

& Entertainment and Devices

divisions experiencing

low/no growth.




1 year returns

MSFT – S&P 500

INTC– S&P 500

INTC– MSFT – QCOM

MSFT and INTC low stock returns

have been substandard to S&P since

June 2012

Despite recent MSFT and INTC price

increases, both still perform well

below the S&P benchmark.

As discussed more in the Industry

Presence analysis, MSFT & INTC’s

overall decreasing stock price trend

can be attributed to:

o low PC sales;

o decreasing market share;

o and a slow economy.

PC sales are anticipating an 11%‐

14% YoY decrease in 2013.

Our macroeconomic analysis

suggests economic activity is

expected to remain slow.

Technology stocks still present

interesting opportunities, given that

the sector has lagged the S&P 500 in

2012‐2013.

Competitors like Qualcomm are

achieving market share growth and

increases in stock returns.

The graph to the left depicts MSFT

and INTC stock prices lagging behind

Qualcomm’s stock price.




Industry Presences

Current versus Purposed Sector Weights

The lower left‐hand chart illustrates the SIF’s 2012 sector exposure. The SIF is currently 2.2% below market weight in

the Information Technology sector. The lower right‐hand chart exhibits the 2013 sector weighting after the

recommended buy and trims in the Information Technology sector. Notice how the SIF will be overweighed by

approximately 8% in the Information Technology sector after the purposed position changes. As our research will

explain in the “Value Creation” section, there is a lot of un‐priced EVA in INTC, MSFT, and QCOM (the SIF’s purposed

holdings). The overweight in the Information Technology sector will position the SIF to experience stock price and yield

increases as the Information Technology sector catches up to the S&P in upcoming cycles.

Industry Outlook

Year‐over‐year decline in PC sales (1Q2012 – 1Q2013)

Industry analysis firms, Gartner and IDC, reported

declines in 1Q13 PC sales that were worse than

anticipated. IDC estimated a 14% year‐over‐year

decline and Gartner estimated the decline at 11%.

This 1Q13 decline is the fourth consecutive quarter

posting a year‐over‐year decline in PC sales. This

trend is expected to continue toward a low as the

PC market shrinks. The PC market as a whole is

getting smaller; therefore growth opportunities are

getting smaller for companies with a significant

percentage of revenue that relies on PC sales.

Companies like INTC/MSFT that currently rely on PC

based product line are realizing diminished revenue

growth and decreased market share. Technology

companies must adjust with the consumer demand

shift. For many companies, this means tailoring to

a more mobile‐based constituency.




Consumers are migrating away from the PC toward mobile devices. Smartphones are in about 55% of U.S. homes today,

an increase of nearly 20% from 2010 when smartphones were in 36% of U.S. homes. According to a study by Accenture,

this growth in demand for mobile devices, particularly smartphones, is not mirrored by the PC. For example, in 2009

26% of consumers who participated in the study owned a smartphone as compared to 58% in 2012. That is a 32% three

year growth of smartphones owned, compared to a 3% growth of PCs owned.

Companies like Google, Apple, and Qualcomm have adapted with this shift in demand and taken advantage of the

mobile industry growth. Wintel has not been so quick to adapt and now struggles to compete as they lose market share

to earlier adapters. The graphs below treat QCOM/INTC's total sales and QCOM/MSFT's total sales as one market

(totaling 100%). Over the past three years while QCOM’s market share has increased by 6.0%, INTC’s market share has

decreased by 6.0%. QCOM is directly stealing INTC’s market share, affecting MSFT as well.




Business Segments

INTC Illustrated below are INTC’s business segments as a percentage of INTC’s total revenues in years 2007 and 2012. Notice

how revenues in INTC’s PC Client Group business segment have declined from 70.8% in 2007 to 64.3% in 2012.

Considering the consumer preference for PCs is declining by 11‐14% year over year, we would expect INTC’s PC Client

Group percentage to decrease by a similar magnitude. At the same time we would expect other segments, such as the

mobile segment, to increase in revenue percentage. However, this is not the case. INTC’s failure to produce increasing

revenues in growing markets segments suggests INTC is unable to adapt core competencies to changing consumer

preferences.




MSFT

The charts below depict MSFT’s current business segments as a percentage of revenues. As to be expected with PC’s

decreasing popularity, MSFT’s Windows segment experiences a 3.5% decrease in percentage of revenues between years

2007 and 2012. However, MSFT’s Entertainment and Devices (which includes mobile devices) has only experienced 1%

growth over this same time period, increasing from 12% to 13%. Where as, MSFT’s server and tools segment has grown

3.6% in the 5 years. This indicates MSFT is focusing on its Server and Tool segment offerings as oppose to

Entertainment and Devices offerings.




Financial Analysis Return on Equity (ROE) and Return on Assets (ROA) INTC – Return on assets has been on a downtrend since the latest recession. ROE has decreased almost 10% from 2011 to 2012 MSFT – Return on assets has not shown any sign of growth since 2007. The year 2012 is the lowest ROA as been in the past six years. ROE has also shown no signs of growth and is at a six year low in 2012. ROE decreased 20% from 2007 to 2012.

Earnings Yield and Dividend Yield INTC – Earnings yield trends an increase. In 2012 earnings yield was at a high of 10.7%. Dividend yield was stagnant from 2009 to 2011 with about a 3% increase in 2012. MSFT – Earnings yield declined sharply in 2012. Dividend yield shows little growth.

INTC MSFT

INTC MSFT




Value Creation Metrics Net Operating Profit After Tax and Free Cash Flow INTC – NOPAT decreased from $12,700 in 2011 to $10,800 in 2012. FCF decreased from 2010 to 2012 by almost $8,000. MSFT – NOPAT trends slight growth with a decrease in 2012. FCF declined from 2009 to 2010 with an increase in 2012.

Economic Value Added and Market Value Added INTC – EVA increased greatly from 2009 to 2010 and stayed about the same level in 2011 but decreased by 2,000 in 2012. The difference between the two variables has been showing a consistent undervaluation since 2010. MSFT – EVA increased from 2009 to 2011 and decreased in 2012 while MVA decreased every year. MSFT appeared close to fairly valued in 2010, but with an EVA increase and MVA decrease is now undervalued. Over the past three years both INTC and MSFT have consistently had an EVA higher than their MVA. This indicates both have un‐priced value creation which we hope to capture in 2013.

INTC MSFT

INTC MSFT




Value Spread: ROIC to WACC INTC – ROIC decreased from 55% in 2011 to a more typical 30% in 2012. With a WACC of 8.3%, ROIC‐WACC spread is 21.7%. This spread indicates INTC has a moderate ability to translated invested capital into revenue increase. MSFT – Since 2007 ROIC has stayed between 70% and 90%. The past three years has been closer to 90% with 88.5% in 2012. With a WACC of 8.1%, ROIC‐WACC spread is 80.4%. This wide spread indicates MSFT has great ability to drive returns with invested capital. WACC Etc.

Other Analyst Recommendation Weighted Average Cost of Capital (WACC) Assumptions INTC – A WACC of 8.1% was calculated using:

Short term debt cost of 1.72%

Long term growth rate of 2.0%

Cost of Equity of 8.7% was calculated using: o Risk Free Rate of 1.72% o Market risk premium of 7.0% o Beta of 1.0

INTC MSFT

INTC MSFT

MSFT – A WACC of 8.3% was calculated using:

Short term debt cost of 1.72%

Long term growth rate of 3.0%

Cost of Equity of 8.7% was calculated using: o Risk Free Rate of 1.72% o Market risk premium of 7.0% o Beta of 1.0




Forecasting assumptions

Forecasting assumptions are largely based on average performance and tapered to perpetuity.

Intel – Income Statement Income Statement adjustments are as follows:

Gross Margin and Operating Profit Margin compressed to reflect 7‐year business cycle average; reduce effect of

recession and expansion.

Net Profit Margin also compressed, consistent with modeling with a margin of safety.

Intel – Balance Sheet

Balance Sheet forecasting assumptions are largely based on average performance and held static in perpetuity.

Adjustments are as follows:

Inventory was adjusted to exclude high inventory carry in 2008 due to the recession.

Total Debt was toward the long‐term historical average.

Total equity was decreased to reflect recent average levels.




Microsoft – Income Statement

Income Statement adjustments are as follows:

Revenue growth was adjusted to Capital IQ analyst expectations then tapered to a conservative perpetuity.

Margins were adjusted to Capital IQ analyst expectations and tapered to conservative perpetuities.

Common shares growth is expected to continue decline while MSFT buys back shares and have 0% growth in

perpetuity.

Dividend growth rate was also reduced, once again consistent with the margin of safety principle.

Microsoft – Balance Sheet

Balance Sheet adjustments are as follows:

Cash and equivalents were tapered off from 2012 to be conservative.

Total receivables average was reduced to offset a high 2008 rate due to the recession.

Inventory was reduced to a conservative rate that was sustained from 2009 to 2010.

Total current assets average was lowered to offset the abnormally high rates in 2011 and 2012.

Net PPE was tapered off in conservation.

Total debt and total equity were raised as a better reflection of the past two years.




Forecast Analysis

Based on the aforementioned forecast we expect the following results:

Total Revenue

INTC – Revenues continue to increase slowly over the next five‐year period. Slow growth is consistent with

pre‐recession and expansion growth trends

MSFT – Revenues maintain steady growth over the next five years.

INTC MSFT

Margin Analysis

Gross Profit and Operating Profit Margins

INTC – Gross Profit and Operating Profit Margins remain average and consistent of the next five years.

Slight decrease in both reflects conservative estimation techniques.

MSFT – Gross Profit and Operating Profit Margins remain high and consistent over the next five years. Slight

decrease in both is due to conservative estimation techniques.

INTC MSFT




INTC – Net Profit Margin decreases and normalizes at pre‐recession level. While free cash flow stabilizes near

historical average.

MSFT – Net Profit and Free Cash Flow Margins stabilize around the historical norm.

INTC MSFT

Earnings Per Share

INTC – Earnings Per Share resume growth similar to 2010 and 2011

MSFT – Earnings Per Share resume pre‐2012 growth and a more moderate rate

Dividends Per Share

INTC – Dividends Per Share exhibits slow growth, slightly disproportional to EPS over the next five years. Slow

growth is due to the use of pre‐recessional style growth assumptions

MSFT – Dividends Per Share continues historical pattern of moderate but consistent growth.

INTC MSFT




Earnings and Dividends Yield

As you can see the earnings and dividend yields have been compressed by conservative modeling assumptions. Notice

how, even in conservation, INTC and MSFT continue to produce attractive and sustainable earnings and dividend yields.

INTC MSFT

INTC

Intrinsic Value Estimation

Based on our modeling assumptions, the intrinsic value of FCFs valuation model shows INTC to be undervalued by

$12.41. This results in a 60.2% undervaluation from the 2012 year‐end storck price of $20.62. Additionally, INTC’s per

share intrinsic value is expected to continue rising. We expect to benefit from the year‐end stock price catching up with

INTC’s intrinsic value.




Dividend Discount Valuation Model The Dividend Discount Valuation Model contradicts the Intrinsic Value of FCF’s Valuation Model. Per the Dividend

Discount Model, the current value of INTC’s future dividends only supports a stock price of $12.18/share. Based on this

model, INTC is 78.08% overvalued. Although, more than half the current stock price is supported by the present value of

dividends alone. With conservative forecasting in place, INTC’s dividend yield is expected to increase from 3.0% to 4.0%

over the next 5 years. Dividend growth rates used were the same rates used in forecasting assumptions. Beta was

smoothed to 1.00 as it was in the WACC assumptions.

MSFT

Intrinsic Value Estimation

Based on our modeling assumptions, the intrinsic value of FCFs valuation model shows MSFT to be undervalued by

$25.39. This results in a 95.0% undervaluation from the 2012 year‐end storck price of $52.10. The margin of

undervaluation has been growing since 2009. Per share intrinsic value is expected to continue rising. Per share intrinsic

value is expected to increase by more than $10.00 by 2017. We expect to benefit from the year‐end stock price catching

up with MSFT’s intrinsic value.




Dividend Discount Valuation Model

The Dividend Discount Valuation Model contradicts the Intrinsic Value of FCF’s Valuation Model. Per the Dividend

Discount Model, the current value of MSFT’S future dividend only supports a stock price of $14.52/share. Based on this

model MSFT is 112.33% overvalued. Although, almost half the current stock price is supported by the present value of

dividends alone. With conservative forecasting in place, MSFT’s dividend yield is expected to decrease from 4.2% to

2.6% over the next 5 years. Dividend growth rates used were the same rates used in forecasting assumptions. Beta was

smoothed to 1.00 as it was in the WACC assumptions.

Recommendation Summary Our decision to equally trim our positions in Intel and Microsoft comes in conjunction with our colleague Brea Short’s

recommendation to buy Qualcomm. In trimming our exposure to Wintel from 10% portfolio weight to that of about 7%,

the Student Investment Fund (SIF) will be able to take on a full 5% position in Qualcomm. It is in the SIF’s best interest

to maintain a partial position in Wintel because Intel and Microsoft are currently providing the SIF with desirable yields

at 3% and 4.2% respectively. However, both Intel and Microsoft have performed poorly compared to the S&P over the

last four‐quarters. Shortly after acquiring Microsoft in May of 2012, both Intel and Microsoft stocks diverged from the

S&P and began a steady decrease in stock price. Over the last year, Intel and Microsoft have exposed the SIF to ‐1.5% in

weighted returns. We attribute Wintel’s poor performance to a failure of the company’s ability to adapt core

competencies to meet changing consumer demand. While competitors have adjusted, Intel/Microsoft failed to respond

to the change in demand from the PC market to mobile device market.

For these conflicting reasons, we recommend only a partial trim of Intel and Microsoft. With the funds recovered from

this trim, we will invest in Qualcomm. This will give the SIF a moderate overweight in the Information Technology

sector. It will also allow the SIF to diversify its IT industry risk by holding stocks that not only have stable, historical

yields, but also innovative, well‐positioned stocks that promise handsome yield growth in the future.

INTC Intel Corporation Sector Information Technology Report Date 5/6/2013 2007

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Total Revenue 38,334 37,586 35,127 43,623 53,999 53,341 56,061 58,595 60,383 61,892 63,130

Gross Profit 19,904 20,844 19,561 28,491 33,757 33,151 33,637 35,157 36,230 37,135 37,878

Operating Income 8,732 9,664 8,639 15,588 17,477 14,638 13,567 14,825 15,096 15,473 15,782

Net Income 6,976 5,292 4,369 11,464 12,942 11,005 10,371 10,840 11,171 11,450 11,679

Retained Earnings 30,848 26,537 26,318 32,919 29,656 32,138 38,144 44,622 51,434 58,572 66,026

Total Common Shares 5,816 5,663 5,557 5,555 5,256 4,996 4,846 4,701 4,561 4,424 4,292

Total Diluted Shares 5,936 5,748 5,645 5,696 5,411 5,160 5,006 4,856 4,710 4,569 4,432

Earnings Per Share $1.20 $0.93 $0.79 $2.06 $2.46 $2.20 $2.14 $2.31 $2.45 $2.59 $2.72

Dividends Per Share $0.45 $0.55 $0.56 $0.63 $0.78 $0.87 $0.90 $0.93 $0.96 $0.97 $0.98

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Cash and Equivalents 7,307 3,350 3,987 5,498 5,065 8,478 6,519 6,814 7,021 7,197 7,341

Total Receivables 2,576 1,712 2,273 2,867 3,874 4,902 3,808 3,980 4,101 4,204 4,288

Inventory 3,370 3,744 2,935 3,757 4,096 4,734 4,485 4,688 4,831 4,951 5,050

Total Current Assets 23,885 19,871 21,157 31,611 25,872 31,358 32,769 34,250 35,295 36,177 36,901

Net PPE 16,918 17,574 17,225 17,899 23,627 27,983 26,129 27,310 28,143 28,847 29,424

Total Assets 55,651 50,472 53,095 63,186 71,119 84,351 80,742 84,391 86,965 89,140 90,922

Payables and Accruals 7,804 5,994 6,649 8,334 9,564 10,362 10,216 10,678 11,004 11,279 11,505

Total Current Liabilities 8,571 7,818 7,591 9,327 12,028 12,898 12,361 12,920 13,314 13,647 13,920

Total Debt 2,120 1,285 2,073 2,128 7,341 13,462 11,212 11,719 12,077 12,378 12,626

Total Equity 42,762 39,546 41,704 49,430 45,911 51,203 50,455 52,736 54,344 55,703 56,817

Historical Income Statement Highlights Forecasted Income Statement Highlights

Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Total Revenue

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Net Income

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Total Current Assets Cash and Equivalents

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0

10,000

20,000

30,000

40,000

50,000

60,000

Total Equity Total Debt

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Earnings Per Share Dividends Per Share

$0

$20,000

$40,000

$60,000

$80,000

$100,000

Total Assets Net PPE

INTC-Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 5 Analysts: Ashley Brecheisen, Stevi Schultz

Margins 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Gross Profit Margin 51.9% 55.5% 55.7% 65.3% 62.5% 62.1% 60.0% 60.0% 60.0% 60.0% 60.0%

Operating Profit Margin 22.8% 25.7% 24.6% 35.7% 32.4% 27.4% 24.2% 25.3% 25.0% 25.0% 25.0%

Net Profit Margin 18.2% 14.1% 12.4% 26.3% 24.0% 20.6% 18.5% 18.5% 18.5% 18.5% 18.5%

Free Cash Flow Margin 19.9% 23.0% 20.6% 23.0% 13.5% 4.1% 26.8% 16.4% 16.9% 17.2% 17.4%

Liquidity and Debt 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Days Sales Outstanding 24.53 16.63 23.62 23.99 26.19 33.54 24.79 24.79 24.79 24.79 24.79

Inventory Turnover 11.38 10.04 11.97 11.61 13.18 11.27 12.50 12.50 12.50 12.50 12.50

Total Debt to Equity 5.0% 3.2% 5.0% 4.3% 16.0% 26.3% 22.2% 22.2% 22.2% 22.2% 22.2%

Total Debt to Assets 3.8% 2.5% 3.9% 3.4% 10.3% 16.0% 13.9% 13.9% 13.9% 13.9% 13.9%

Profitability 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Total Asset Turnover 0.69 0.74 0.66 0.69 0.76 0.63 0.69 0.69 0.69 0.69 0.69

Equity Multiplier 1.30 1.28 1.27 1.28 1.55 1.65 1.60 1.60 1.60 1.60 1.60

Return on Assets 12.5% 10.5% 8.2% 18.1% 18.2% 13.0% 12.8% 12.8% 12.8% 12.8% 12.8%

Return on Equity 16.3% 13.4% 10.5% 23.2% 28.2% 21.5% 20.6% 20.6% 20.6% 20.6% 20.6%

Return on Capital 29.7% 32.6% 33.5% 55.1% 46.9% 30.3% 32.7% 34.2% 33.8% 33.8% 33.8%

0.000.200.400.600.801.001.201.401.601.80

0.0

0.1

0.2

0.3

0.4

0.5

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0.8

Total Asset Turnover Equity Multiplier

0

2

4

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8

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12

14

0

5

10

15

20

25

30

35

40

Days Sales Outstanding Inventory Turnover

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30%

40%

50%

60%

70%

Gross Profit Margin Operating Profit Margin

0%

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10%

15%

20%

25%

30%

Net Profit Margin Free Cash Flow Margin

0%

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10%

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30%

Total Debt to Equity Total Debt to Assets

0%

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30%

Return on Equity Return on Assets

0%

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30%

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Return on Equity Return on Capital


Capital, NOPAT & FCF 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

NOWC 5,449 2,812 2,546 3,788 3,471 7,752 4,595 4,803 4,949 5,073 5,175

Net Fixed Assets 16,918 17,574 17,225 17,899 23,627 27,983 26,129 27,310 28,143 28,847 29,424

Total Invested Capital 22,367 20,386 19,771 21,687 27,098 35,735 30,724 32,113 33,093 33,920 34,598

Effective Tax Rate 23.9% 31.1% 23.4% 23.4% 27.2% 26.0%

NOPAT 6,646 6,654 6,617 11,940 12,721 10,831 10,039 10,969 11,170 11,449 11,678

Free Cash Flow N/A 8,635 7,232 10,024 7,310 2,194 15,049 9,580 10,190 10,622 11,000

NOPAT Per Share 1.14 1.17 1.19 2.15 2.42 2.17 2.07 2.33 2.45 2.59 2.72

FCF/Share N/A 1.52 1.30 1.80 1.39 0.44 3.11 2.04 2.23 2.40 2.56


Intrinsic Value of FCFs Valuation Model

Value Creation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Economic Value-Added 4,834 5,003 5,016 10,183 10,526 7,937 7,550 8,368 8,489 8,702 8,876

Market Valued-Added 112,293 43,474 71,659 67,392 81,547 51,815 113,599 115,194 117,245 119,446 121,835

PV of Future FCFs 144,136 147,175 151,864 154,141 159,316 170,026 168,748 172,836 176,644 180,330 183,937

Value of Non-Oper. Assets 7,307 3,350 3,987 5,498 5,065 8,478 6,519 6,814 7,021 7,197 7,341

Total Intrinsic Firm Value 151,443 150,525 155,851 159,639 164,381 178,504 175,267 179,649 183,666 187,527 191,278

Intrinsic Value of Equity 149,323 149,240 153,778 157,511 157,040 165,042 164,055 167,930 171,589 175,149 178,652

Per Share Intrinsic Value $25.67 $26.35 $27.67 $28.35 $29.88 $33.03 $33.85 $35.72 $37.62 $39.59 $41.63

Year-End Stock Price $26.66 $14.66 $20.40 $21.03 $24.25 $20.62

Over (Under) Valuation/Sh $0.99 ($11.69) ($7.27) ($7.32) ($5.63) ($12.41)

% Over (Under) Valued 3.7% -79.8% -35.7% -34.8% -23.2% -60.2%

Cost of Capital 2012 Weight % Cost Wgt Cost

Equity Capitalization 103,018 88.4% 8.7% 7.7%

Total Debt 13,462 11.6% 4.5% 0.4%

Preferred Stock 0 0.0% 0.0% 0.0%

Value of All Securities 116,480 100.0%

Effective Tax Rate 26.0% Long-Term Growth Rate:

Risk-Free Rate 1.72% 2.0%

5-Yr Beta 1.02 Alternative Beta:

Market Risk Premium 7.0% 1.00

CAPM Cost of Equity 8.7%

8.1%

(Tax rate from last historical year used in forecasts)

Weighted Average Cost of Capital:

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000


$0$5

$10$15$20$25$30$35$40$45

Year-End Stock Price Per Share Intrinsic Value

-100%

-80%

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-40%

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0%

20%

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

2007 2008 2009 2010 2011 2012

Over (Under) Valuation/Sh % Over (Under) Valued

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Total Invested Capital Net Fixed Assets

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

NOPAT Free Cash Flow


Relative Valuation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Stock Price/Intr. Value $26.66 $14.66 $20.40 $21.03 $24.25 $20.62 $33.85 $35.72 $37.62 $39.59 $41.63

Price to Earnings 22.2 15.7 25.9 10.2 9.8 9.4 15.8 15.5 15.4 15.3 15.3

Price to Free Cash Flow N/A 9.6 15.7 11.7 17.4 47.0 10.9 17.5 16.8 16.5 16.2

Price to Sales 4.0 2.2 3.2 2.7 2.4 1.9 2.9 2.9 2.8 2.8 2.8

Price to Book 2.8 1.6 2.1 1.8 1.8 1.2 2.0 2.0 2.0 2.0 2.0

Earnings Yield 4.5% 6.4% 3.9% 9.8% 10.2% 10.7% 6.3% 6.5% 6.5% 6.5% 6.5%

Dividend Yield 1.7% 3.7% 2.7% 3.0% 3.2% 4.2% 2.7% 2.6% 2.5% 2.5% 2.4%

Free Cash Flow Yield N/A 10.4% 6.4% 8.6% 5.7% 2.1% 9.2% 5.7% 5.9% 6.1% 6.2%

Relative Valuation Pricing Model Adjust 2013 Intrinsic Dividend Discount Valuation Model

2013E Ratio Ratio Ratio Metric Value INTC Intel Corporation

Price to Earnings 15.8 $2.14 $33.85 3.5% 3.0% 3.0% 2.0% 1.0%

Price to Free Cash Flow 10.9 $3.11 $33.85 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Price to Sales 2.9 $11.57 $33.85 $0.45 $0.55 $0.56 $0.63 $0.78 $0.87 $0.90 $0.93 $0.96 $0.97 $0.98

Price to Book 2.0 $16.66 $33.85

1-Yr Div Growth 11.2% PV Dividends 1-4 $3.05 Dividend Yeld 3.7%

2013E 3-Yr Div Growth 15.8% PV Perpetual Div. $9.12

Current Price $23.66 5-Yr Div Growth 14.1% Intrinsic Value $12.18 If Purchased For: $12.18

PV of Free Cash Flows $33.85 Risk-Free Rate 1.72% Current Price $23.66 Expected Return = 8.7%

Dividend Discount Model $12.18 5-Yr Beta 1.02 ($12.18) $0.90 $0.93 $0.96 $13.72 $12.75

Price to Earnings $33.85 Market Premium 7.0% Analyst Notes:

Price to Free Cash Flow $33.85 Required Return 8.7% Based on a current dividend of $0.87, expected growth as shown above and an equity required

Price to Sales $33.85 Alternative Beta 1.00 return of 8.7%, INTC is worth $12.18 per share, vs. a current price of $23.66.

Price to Book $33.85

Compared With: Compared With:

QUALCOMM Incorporated S&P 500 Index

Samsung Electronics Co. Ltd.

Expected Dividend Growth Rates

Intrinsic Value Estimates vs. Current Price

May 6, 2013

Annual Dividend

0

10

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30

40

50

Price to Earnings Price to Free Cash Flow

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Price to Sales Price to Book

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PV of FreeCash Flows

DividendDiscount

Model

Price toEarnings

Price to FreeCash Flow

Price toSales

Price toBook


-40%

-30%

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0%

10%

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30%INTC QCOM Samsung

-40%

-30%

-20%

-10%

0%

10%

20%INTC ^SPX


Piotroski Financial Fitness Scorecard (10-point scale) 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Positive Net Income 1 1 1 1 1 1 1 1 1 1

Positive Free Cash Flow 1 1 1 1 1 1 1 1 1 1

Growing ROA (% change NI > % change TA) 0 0 1 1 0 0 0 0 0 0

Earnings Quality (Operating Income > Net Income) 1 1 1 1 1 1 1 1 1 1

Total Assets Growing Faster Than Total Liabilities 1 0 1 0 0 1 1 0 0 0

Increasing Liquidity (Current Ratio) 0 1 1 0 1 0 1 0 0 0

% Change Shares Outstanding (Diluted) < +2.0% 1 1 0 0 0 0 0 0 0 0

Expanding Gross Margin 1 1 1 0 0 0 0 0 0 0

Asset Turnover (% change sales > % change assets) 1 0 1 1 0 1 0 0 0 0

Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 1 1 1 1 1 1

Piotroski Score 8 7 9 6 5 6 6 4 4 4

Altman Probability of Bankruptcy Z-Score Weight 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

(Current Assets-Current Liabilities)/Total Assets 1.200 0.2866 0.3066 0.4232 0.2336 0.2626 0.3033 0.3033 0.3033 0.3033 0.3033

Retained Earnings/Total Assets 1.400 0.8557 0.6997 0.5831 0.6480 0.4922 0.5572 0.6328 0.7183 0.8078 0.9019

Earnings Before Interest & Tax/Total Assets 3.300 0.6319 0.5369 0.8141 0.8110 0.5727 0.5545 0.5797 0.5728 0.5728 0.5728

Market Value Equity/Total Liabilities 0.600 4.5590 5.9712 5.0954 3.0338 1.8647 3.2500 3.1829 3.1560 3.1429 3.1429

Sales/Total Assets 0.999 0.7439 0.6609 0.6897 0.7585 0.6317 0.6936 0.6936 0.6936 0.6936 0.6936

Altman Score 7.08 8.18 7.61 5.48 3.82 5.36 5.39 5.44 5.52 5.61

The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23

0

2

4

6

8

10

Piotroski Financial Fitness Scorecard (10-pt scale)

0123456789

Altman Probability of Bankruptcy Z-Score


MSFT Microsoft Corporation Sector Information Technology Report Date 5/6/2013 2007

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Total Revenue 51,122 60,420 58,437 62,484 69,943 73,723 78,810 85,036 89,942 93,540 96,346

Gross Profit 40,429 48,822 46,282 50,089 54,366 56,193 58,792 63,437 67,097 69,781 71,874

Operating Income 18,949 24,071 20,693 24,098 27,161 27,956 27,662 31,463 33,279 34,610 35,648

Net Income 14,065 17,681 14,569 18,760 23,150 16,978 22,618 25,936 25,246 26,256 27,044

Retained Earnings (31,114) (27,703) (23,793) (17,736) (8,195) (856) 14,485 32,679 49,842 67,817 86,541

Total Common Shares 9,742 9,328 8,945 8,813 8,490 8,396 8,270 8,146 8,024 7,903 7,785

Total Diluted Shares 9,886 9,470 8,996 8,927 8,593 8,506 8,378 8,253 8,129 8,007 7,887

Earnings Per Share $1.44 $1.90 $1.63 $2.13 $2.73 $2.02 $2.73 $3.18 $3.15 $3.32 $3.47

Dividends Per Share $0.40 $0.44 $0.52 $0.52 $0.64 $0.80 $0.88 $0.95 $1.01 $1.05 $1.07

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Cash and Equivalents 6,111 10,339 6,076 5,505 9,610 6,938 7,251 7,653 7,915 8,044 8,093

Total Receivables 11,338 13,589 11,192 13,014 14,987 15,780 15,762 17,007 17,988 18,708 19,269

Inventory 1,127 985 717 740 1,372 1,137 946 1,020 1,079 1,122 1,156

Total Current Assets 40,168 43,242 49,280 55,676 74,918 85,084 66,988 72,280 76,451 79,509 81,894

Net PPE 4,350 6,242 7,535 7,630 8,162 8,269 8,275 8,504 8,545 8,419 7,708

Total Assets 63,171 72,793 77,888 86,113 108,704 121,271 112,145 121,005 127,987 133,106 137,100

Payables and Accruals 5,572 6,968 6,480 7,308 7,772 8,050 8,882 9,583 10,136 10,542 10,858

Total Current Liabilities 23,754 29,886 27,034 26,147 28,774 32,688 35,157 37,934 40,123 41,728 42,980

Total Debt 0 2,614 7,430 6,121 13,129 11,527 11,033 11,905 12,592 13,096 13,488

Total Equity 31,097 36,286 39,558 46,175 57,083 66,363 66,988 72,280 76,451 79,509 81,894

Historical Income Statement Highlights Forecasted Income Statement Highlights

Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

Total Revenue

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$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Net Income

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000$90,000

Total Current Assets Cash and Equivalents

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

010,00020,00030,00040,00050,00060,00070,00080,00090,000

Total Equity Total Debt

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

Earnings Per Share Dividends Per Share

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

Total Assets Net PPE

MSFT-Performance-Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 5 Analysts: Ashley Brecheisen, Stevi Schultz

Margins 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Gross Profit Margin 79.1% 80.8% 79.2% 80.2% 77.7% 76.2% 74.6% 74.6% 74.6% 74.6% 74.6%

Operating Profit Margin 37.1% 39.8% 35.4% 38.6% 38.8% 37.9% 35.1% 37.0% 37.0% 37.0% 37.0%

Net Profit Margin 27.5% 29.3% 24.9% 30.0% 33.1% 23.0% 28.7% 30.5% 28.1% 28.1% 28.1%

Free Cash Flow Margin 30.4% 18.3% 34.8% 27.5% 22.3% 32.0% 27.7% 26.7% 27.3% 27.8% 28.6%

Liquidity and Debt 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Days Sales Outstanding 80.95 82.09 69.91 76.02 78.21 78.13 73.00 73.00 73.00 73.00 73.00

Inventory Turnover 45.36 61.34 81.50 84.44 50.98 64.84 83.33 83.33 83.33 83.33 83.33

Total Debt to Equity 0.0% 7.2% 18.8% 13.3% 23.0% 17.4% 16.5% 16.5% 16.5% 16.5% 16.5%

Total Debt to Assets N/A 3.6% 9.5% 7.1% 12.1% 9.5% 9.8% 9.8% 9.8% 9.8% 9.8%

Profitability 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Total Asset Turnover 0.81 0.83 0.75 0.73 0.64 0.61 0.70 0.70 0.70 0.70 0.70

Equity Multiplier 2.03 2.01 1.97 1.86 1.90 1.83 1.67 1.67 1.67 1.67 1.67

Return on Assets 22.3% 24.3% 18.7% 21.8% 21.3% 14.0% 20.2% 21.4% 19.7% 19.7% 19.7%

Return on Equity 45.2% 48.7% 36.8% 40.6% 40.6% 25.6% 33.8% 35.9% 33.0% 33.0% 33.0%


0.00

0.50

1.00

1.50

2.00

2.50

0.00.10.20.30.40.50.60.70.80.9

Total Asset Turnover Equity Multiplier

0102030405060708090

60

65

70

75

80

85

Days Sales Outstanding Inventory Turnover

0%10%20%30%40%50%60%70%80%90%

Gross Profit Margin Operating Profit Margin

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25%

30%

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Net Profit Margin Free Cash Flow Margin

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Total Debt to Equity Total Debt to Assets

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Return on Equity Return on Assets

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Return on Equity Return on Capital


Capital, NOPAT & FCF 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

NOWC 13,004 17,945 11,505 11,951 18,197 15,805 15,077 16,098 16,847 17,333 17,661

Net Fixed Assets 4,350 6,242 7,535 7,630 8,162 8,269 8,275 8,504 8,545 8,419 7,708

Total Invested Capital 17,354 24,187 19,040 19,581 26,359 24,074 23,352 24,601 25,391 25,752 25,368

Effective Tax Rate 30.0% 25.8% 26.5% 26.5% 17.5% 23.8%

NOPAT 13,259 17,872 15,210 17,713 22,400 21,316 21,092 23,990 25,374 26,389 27,181

Free Cash Flow N/A 11,039 20,357 17,172 15,622 23,601 21,814 22,740 24,584 26,028 27,564

NOPAT Per Share 1.36 1.92 1.70 2.01 2.64 2.54 2.55 2.94 3.16 3.34 3.49

FCF/Share N/A 1.18 2.28 1.95 1.84 2.81 2.64 2.79 3.06 3.29 3.54


Intrinsic Value of FCFs Valuation Model

Value Creation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Economic Value-Added 11,790 15,825 13,598 16,055 20,168 19,278 19,115 21,908 23,225 24,209 25,034

Market Valued-Added 315,718 145,050 233,086 199,796 163,317 157,892 386,814 397,044 407,949 419,886 432,290

PV of Future FCFs 362,373 382,007 393,984 410,160 429,256 441,989 457,586 473,577 489,077 504,446 519,579

Value of Non-Oper. Assets 6,111 10,339 6,076 5,505 9,610 6,938 7,251 7,653 7,915 8,044 8,093

Total Intrinsic Firm Value 368,484 392,346 400,060 415,665 438,866 448,927 464,836 481,230 496,992 512,490 527,672

Intrinsic Value of Equity 368,484 389,732 392,630 409,544 425,737 437,400 453,803 469,325 484,400 499,395 514,184

Per Share Intrinsic Value $37.82 $41.78 $43.89 $46.47 $50.15 $52.10 $54.87 $57.61 $60.37 $63.19 $66.05

Year-End Stock Price $35.60 $19.44 $30.48 $27.91 $25.96 $26.71

Over (Under) Valuation/Sh ($2.22) ($22.34) ($13.41) ($18.56) ($24.19) ($25.39)

% Over (Under) Valued -6.2% -114.9% -44.0% -66.5% -93.2% -95.0%

Cost of Capital 2012 Weight % Cost Wgt Cost

Equity Capitalization 224,255 95.1% 8.7% 8.3%

Total Debt 11,527 4.9% 4.5% 0.2%

Preferred Stock 0 0.0% 0.0% 0.0%

Value of All Securities 235,782 100.0%

Effective Tax Rate 23.8% Long-Term Growth Rate:

Risk-Free Rate 1.72% 3.0%

5-Yr Beta 0.94 Alternative Beta:

Market Risk Premium 7.0% 1.00

CAPM Cost of Equity 8.7%

8.5%

(Tax rate from last historical year used in forecasts)

Weighted Average Cost of Capital:

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000


$0

$10

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$30

$40

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$60

$70

Year-End Stock Price Per Share Intrinsic Value

-140%

-120%

-100%

-80%

-60%

-40%

-20%

0%

($30)

($25)

($20)

($15)

($10)

($5)

$0

2007 2008 2009 2010 2011 2012

Over (Under) Valuation/Sh % Over (Under) Valued

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Total Invested Capital Net Fixed Assets

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

NOPAT Free Cash Flow


Relative Valuation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Stock Price/Intr. Value $35.60 $19.44 $30.48 $27.91 $25.96 $26.71 $54.87 $57.61 $60.37 $63.19 $66.05

Price to Earnings 24.7 10.3 18.7 13.1 9.5 13.2 20.1 18.1 19.2 19.0 19.0

Price to Free Cash Flow N/A 16.4 13.4 14.3 14.1 9.5 20.8 20.6 19.7 19.2 18.7

Price to Sales 6.8 3.0 4.7 3.9 3.2 3.0 5.8 5.5 5.4 5.3 5.3

Price to Book 5.5 2.5 3.5 2.9 2.0 1.8 4.0 3.9 3.8 3.8 3.8

Earnings Yield 4.1% 9.8% 5.3% 7.6% 10.5% 7.6% 5.0% 5.5% 5.2% 5.3% 5.3%

Dividend Yield 1.1% 2.3% 1.7% 1.9% 2.5% 3.0% 1.6% 1.6% 1.7% 1.7% 1.6%

Free Cash Flow Yield N/A 6.1% 7.5% 7.0% 7.1% 10.5% 4.8% 4.8% 5.1% 5.2% 5.4%

Relative Valuation Pricing Model Adjust 2013 Intrinsic Dividend Discount Valuation Model

2013E Ratio Ratio Ratio Metric Value MSFT Microsoft Corporation

Price to Earnings 20.1 $2.73 $54.87 10.0% 8.0% 6.0% 4.0% 2.0%

Price to Free Cash Flow 20.8 $2.64 $54.87 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Price to Sales 5.8 $9.53 $54.87 $0.40 $0.44 $0.52 $0.52 $0.64 $0.80 $0.88 $0.95 $1.01 $1.05 $1.07

Price to Book 4.0 $13.56 $54.87

1-Yr Div Growth 25.0% PV Dividends 1-4 $3.15 Dividend Yeld 2.6%

2013E 3-Yr Div Growth 15.4% PV Perpetual Div. $11.38

Current Price $30.83 5-Yr Div Growth 14.9% Intrinsic Value $14.52 If Purchased For: $14.52

PV of Free Cash Flows $54.87 Risk-Free Rate 1.72% Current Price $30.83 Expected Return = 8.7%

Dividend Discount Model $14.52 5-Yr Beta 0.94 ($14.52) $0.88 $0.95 $1.01 $16.94 $15.90

Price to Earnings $54.87 Market Premium 7.0% Analyst Notes:

Price to Free Cash Flow $54.87 Required Return 8.7% Based on a current dividend of $0.80, expected growth as shown above and an equity required

Price to Sales $54.87 Alternative Beta 1.00 return of 8.7%, MSFT is worth $14.52 per share, vs. a current price of $30.83.

Price to Book $54.87

Compared With: Compared With:

QUALCOMM Incorporated S&P 500 Index

Intel Corporation

Expected Dividend Growth Rates


May 6, 2013

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Price to Earnings Price to Free Cash Flow

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Piotroski Financial Fitness Scorecard (10-point scale) 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Positive Net Income 1 1 1 1 1 1 1 1 1 1

Positive Free Cash Flow 1 1 1 1 1 1 1 1 1 1

Growing ROA (% change NI > % change TA) 1 0 1 0 0 1 1 0 0 0

Earnings Quality (Operating Income > Net Income) 1 1 1 1 1 1 1 1 1 1

Total Assets Growing Faster Than Total Liabilities 0 1 1 0 1 0 1 0 1 0

Increasing Liquidity (Current Ratio) 1 0 1 1 0 0 0 0 0 0

% Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1 1 1 1 1 1 1

Expanding Gross Margin 1 0 1 0 0 0 0 0 0 0

Asset Turnover (% change sales > % change assets) 1 0 0 0 0 1 0 0 0 0

Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 1 1 1 1 1 1

Piotroski Score 9 6 9 6 6 7 7 5 6 5

Altman Probability of Bankruptcy Z-Score Weight 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

(Current Assets-Current Liabilities)/Total Assets 1.200 0.2202 0.3427 0.4115 0.5094 0.5185 0.3406 0.3406 0.3406 0.3406 0.3406

Retained Earnings/Total Assets 1.400 -0.5984 -0.4979 -0.3868 -0.2284 -0.0946 -0.0107 0.1676 0.3575 0.5242 0.6925

Earnings Before Interest & Tax/Total Assets 3.300 1.0912 0.8767 0.9235 0.8245 0.7607 0.8140 0.8581 0.8581 0.8581 0.8581

Market Value Equity/Total Liabilities 0.600 2.9803 4.2678 3.6953 2.5618 2.4505 6.0297 5.7793 5.6396 5.5905 5.5884

Sales/Total Assets 0.999 0.8292 0.7495 0.7249 0.6428 0.6073 0.7020 0.7020 0.7020 0.7020 0.7020

Altman Score 4.52 5.74 5.37 4.31 4.24 7.88 7.85 7.90 8.02 8.18

The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23

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Piotroski Financial Fitness Scorecard (10-pt scale)

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Documents

INTC Intel Corporation Sector: Information Technology TRIMIntel Corporation designs, manufactures, and sells integrated digital technology platforms worldwide. The company operates