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INTEL - Balancing Technical Analysis with Fundamental AnalysisI trust you enjoyed the previous study, which primarily focused on the Technical Analysis using the Ian High Jump Indicator to arrive at Target Prices for the short, intermediate and long term. The final step is to have a check and balance evaluation by using Fundamental Analysis of earnings expectations and P-E for tests of reasonableness. Qtr ended Sep 30, 98 Qtr ended Dec 31, 98 Qtr ended Mar 31, 99 Qtr ended Jun 30, 99 $0.44 vs 0.44 0% $0.59 vs 0.49 +20% $0.57 vs 0.41 +39% $0.51 vs 0.33 +55%
Observations:1. Earnings Growth Rate is increasing - 0% to 20% to 39% to 55% 2. Earnings "Optics" (qtr to qtr momentum) is decreasing - 44c to 59c to 57c to 51c 3. The 1999 est. of $2.25 is suspect. The analysts will have to raise their estimates. Why? 4. The first two qtrs. of the fiscal year give us 57c + 51c = $1.08. If we assume that the earnings growth rate for the next two qtrs is only 30% each, we should see 57c and 77c, respectively for the 3rd and 4th qtrs. This suggests that the 3rd qtr TTM will be 59c + 57c + 51c + 57c = $2.24, and the year end TTM will be 57c + 51c + 57c + 77c = $2.42
5. Now we must do tests of reasonableness. Trot over to your friendly Zacks EPS reports and see what they say the pundits are forecasting for INTC´s earnings. I find 56c & 61c, and 63c & 70c for the mean and high estimates for September and December, respectively. Also, $2.27 and $2.38 for year end 1999. So their numbers are a trifle better than DG´s for 1999, as shown above, which has it at $2.25 for the mean estimate. Again, it´s a judgment call, and I believe the mean estimates are low, especially when I see that INTC consistently delivers a 3c to 4c earnings surprise, except for last qtr. I am comfortable that my estimate of 57c or 30% up is reasonable at this point, and if anything on the low side, while the 77c may be a tad high. All in all, the two together is close enough for now. 6. The P-E is currently at the top end of its historic range of 38. Given an upward moving market, and INTC being a leader, we should expect this to be exceeded by at least 2 to 3 P-E. Given $2.24 for the 3rd qtr TTM EPS and $2.42 for the 4th qtr, and a 38 to 41 P-E should give us a 3rd qtr estimate of $85 to $90, and a year end price estimate of $92 to $99. Balancing the Technical Analysis with the Fundamental Analysis
The Messages:Applying the Fundamental Analysis shown in item "6´ above to the chart we produced in the previous study gives us a feel for how the range in price growth should materialize over the short, intermediate and long term respectively, as shown by the blue, yellow and purpe shaded blocks. Clearly $112, colored in red, would seem to be too optimistic and cannot be supported by the fundamental analysis, unless Intel either drives to a climax run with a very strong market or the earnings results and estimates are improved over the next two quarters.
However, there is one other factor, which one should recognize as extremely important in understanding how the High Jump Indicator % readings should be applied during the course of a stocks core drive as it moves from basing to breakout to ultimately being very extended. Initially, your focus should be on the values for the 17 and 50 Day MA percentages to the height of the stocks price, as depicted by the blue colored boxes, i.e., give more weight to the distances off these moving averages to establish the potential ranges for price maturity at the early stages of breakout. Then having corrected, the next upward move would take you towards the 50 day and 200 Day MA percentages, as depicted by the yellow boxes, until the stock ultimately gets very extended from its base low when you would apply the highest levels as depicted by the 200 Day MA and Base Low percentages - the purple and red boxes. One last point; if you are a short term trader primarily interested in playing solid stocks like the Fab5 of INTC, CSCO, DELL, MSFT and SUNW over the short term of 20 to 40 days say, then your measurements would be BIASED towards the distances from the 17 and 50 Day MA´s, since your intent is to drive for short term gains, and the fundamental analysis will drive you to the top left hand corner of the matrix shown above - the Blue Boxes! The Bottom Line:The Objective of HGS Investing is to provide a balanced approach by applying the best methods of fundamental and technical analysis. Too often, with the pressure of time, the novice tends towards the technical analysis alone since that is generally easier and less time consuming to dig for information. To aspire to being a complete HGS Investor you should do both. Its not difficult, but it will provide added pay dirt.
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