Key insights
- The author argues that an EV/TC ratio below 1.0 for Intel (INTC) signaled peak investor pessimism and a potential value opportunity. This ratio, calculated as (market cap + debt - cash) / (debt + shareholders' equity), reflects the market's belief in the company's ability to generate returns on its capital base. The author suggests this metric, based on fundamental economic principles, can be a useful signal for value investors.
It is a core finance truth that a company has to spend money to produce a product and make money. That spending can be on physical assets or intellectual assets or human capital. For value investing, it is best to have a business that has physical assets that underpin the business because a physical asset can be most easily valued with real world comparables compared to IP and human capital. The value of the latter two depend on the future earnings potential which is subject to large potential disparities.
For the vast majority of INTC's life as a public company, the EV (mkt cap+net debt) exceeded the total capital on the balance sheet. 2x was a pretty standard level but it got as high at 8x in dotcom boom.
In Q4 2024, the EV was $116B and total capital was $155B for an all time low of 0.74x. The ratio fell below 1.0x for the first time in Q2 2024 (0.89x) and fell again the next quarter (0.83x) even as the capital base was shrinking due to writeoffs. This period marked maximum despondency in the investor base. Investors clearly believed that the capital base was incapable of generating returns in excess of the cost of capital for the foreseeable future. This might have been true. Value investors face this kind of sentiment all the time. Companies only become cheap because investors have lost hope.
I like this signal because it fundamentally aligns with the simplest of economic realities: money invested has to generate a sufficient return for a business to survive. Multiple on sales or on earnings or on FCF are all proxies for this economic reality.
All you need to measure this ratio is the mkt cap, debt, SE, and cash.
(mkt cap + debt - cash) / (debt + SE)