Dividend Monk
submits:
Summary
- Intel (
INTC
) is a large and complex tech company that seems to be
transitioning to a value stock.
- Revenue, earnings, and cash flow have been erratic.
- The current dividend yield is approximately 3% with a low
payout ratio.
- The dividend growth rate over the past few years has been in
the double digits.
- The balance sheet is very strong.
- With a P/E of less than 12, the question is, is Intel a value
play or a value trap?
Click to enlarge charts
Overview
Intel is the world's leading semiconductor company and produces
some of the most technologically advanced products in the world.
According to a recent press release, the company makes over 10
billion transistors per second.
Operating Segments
Intel is currently divided into nine operating segments:
- PC Client Group
- Data Center Group
- Embedded and Communications Group
- Digital Home Group
- Ultra-Mobility Group
- NAND Solutions Group
- Wind River Solutions Group
- Software and Services Group
- Digital Health Group
Geographic Revenue Breakdown:
In 2009, Intel derived 55% of revenue from the Asia-Pacific
region, 20% from the Americas, 15% from Europe, and 10% from Japan.
In comparison, back in 1999, Intel derived 23% from Asia-Pacific,
43% from the Americas, 27% from Europe, and 7% from Japan.
Revenue, Earnings, Cash Flow, and Metrics
Intel has been in a period of slow and erratic growth.
Revenue Growth
|
Year
|
Revenue
|
| TTM |
$42.735 billion |
| 2009 |
$35.127 billion |
| 2008 |
$37.586 billion |
| 2007 |
$38.334 billion |
| 2006 |
$35.382 billion |
| 2005 |
$38.826 billion |
| 2004 |
$34.209 billion |
Over this period between 2004 and 2009, Intel experienced less
than 1% revenue growth. The trailing-twelve-month period, however,
shows a substantial rebound.
Even taking a step back and looking at Intel's progress over a
longer period, however, the company has not grown so well. Revenue
in 2000 was $33.7 billion and 9 years later in 2009, the revenue
was $35.1 billion.
Earnings Growth
|
Year
|
Earnings
|
| TTM |
$10.566 billion |
| 2009 |
$4.369 billion |
| 2008 |
$5.292 billion |
| 2007 |
$6.976 billion |
| 2006 |
$5.044 billion |
| 2005 |
$8.664 billion |
| 2004 |
$7.516 billion |
Earnings growth over the 2004-2009 period has been deeply
negative. The trailing-twelve-month period, however, has seen a
large rebound.
Operating Cash Flow Growth
|
Year
|
Cash Flow
|
| TTM |
$14.547 billion |
| 2009 |
$11.170 billion |
| 2008 |
$10.926 billion |
| 2007 |
$12.625 billion |
| 2006 |
$10.620 billion |
| 2005 |
$14.823 billion |
| 2004 |
$13.119 billion |
The cash flow pattern follows the same general pattern as
earnings, although the numbers are significantly less erratic.
Metrics
Intel has return on equity ((ROE)) of 10.75. Intel stock
currently has a P/E of 11.5 and a P/B of 2.7.
Dividends
Intel currently yields approximately 3% and pays out
approximately a third of its EPS as dividends.
Dividend Growth
|
Year
|
Dividend
|
Yield
|
| 2010 |
$0.63 |
1.90% |
| 2009 |
$0.56 |
1.90% |
| 2008 |
$0.5475 |
2.20% |
| 2007 |
$0.45 |
1.70% |
| 2006 |
$0.40 |
0.90% |
| 2005 |
$0.32 |
0.40% |
| 2004 |
$0.16 |
0.40% |
The annualized dividend growth from 2004 to 2010 has been over
25%. The most recent increase was 12.5%, and the increase before
that was only 2%. The increase for 2011 will be to $0.18 per
quarter, which is nearly 15% over the current year.
Balance Sheet
Intel has a very strong balance sheet. The current ratio is over
3, and total debt to equity is a tiny 0.05. Goodwill and intangible
assets make up a fairly small part of total shareholder equity.
Investment Thesis
Intel is clearly a value stock now. The primary question,
however, is whether it is a value play or a value trap.
Bad News for Intel
Intel has not experienced an easy decade. The millennium started
with the tech crash. During the middle of the decade, Intel
experienced strong competition from [[AMD]] and had a couple of
years of disappointing performance until it solidified its leading
position. More recently, Intel has largely missed out on the mobile
computing wave because its processors are powerful but not as
energy efficient as some competing products. Intel currently has a
huge market share of personal computers which, according to many,
is not a particularly good area to be in with the rise of both
mobile computing and cloud computing. Intel is essentially
comparable to Microsoft (
MSFT
) in this aspect, except on the hardware side.
Recently, Intel announced plans to acquire McAfee (
MFE
), and this is the largest acquisition in Intel's history. Whether
this falls under "good news" or "bad news" is for the reader to
decide, but based on the stock valuation, this news has investors
jittery, and for good reason.
McAfee is a large provider of security software. Intel hopes to
turn McAfee into a wholly-owned Intel subsidiary, and to integrate
McAfee's software into Intel's hardware lineup to achieve
synergies.
First of all, this acquisition shows Intel taking a serious
detour from its hardware route. Whereas
Texas Instruments
(
TXN
) has been focusing and streamlining its business, Intel has taken
the opposite approach and has been diversifying its business. Intel
has called this a transition from a PC company to a computing
company.
Second, the price that was paid does not seem particularly
justifiable unless several assumptions of synergies are completely
accurate. Intel agreed to pay $48/share, which represents a 60%
premium to McAfee's already rich stock price at the time. This deal
is planned to be an all-cash transaction, with Intel paying $7.68
billion, net of cash for $6.8 billion. McAfee currently has about
$175 million in net earnings, depending on which full-year period
is used.
Paying $6.8 billion for $175 million in earnings translates into
a P/E of about 40. McAfee has doubled its revenue between 2005 and
the current trailing-twelve-month period, and over that same time
period has grown earnings from roughly $140 billion to roughly $180
million. This is revenue growth of approximately 18%, and earnings
growth of approximately 5%. The PEG ratio based on company earnings
for this investment from Intel's standpoint, then, is 8. In order
for this purchase to be worthwhile, Intel is going to have to
derive some serious growth from McAfee or some translational growth
in improved hardware/software synergy.
Good News for Intel
The company seems to be reaching a point where growth investors
are fleeing and value investors are stepping in. A translation like
this may result in a fairly undervalued stock price.
Intel has continued to invest heavily in this recession. The
company is opening up a new multi-billion dollar research and
development facility in Portland, Oregon, and is re-tooling four
other US locations to develop 22nm chips (from 45nm and 65nm).
Intel produces microprocessors with 45nm process technology and
32nm process technology, and will be producing with 22nm process
technology in 2011.
Internet traffic has a 40% annualized growth rate, with video
and file sharing leading the bandwidth growth. With smaller chips
and more mobile devices being connected to the internet, Intel
realizes that security is of immense importance. In less than 3
years, Malware in McAfee's databases has more than quadrupled.
That's why Intel considers its three pillars to be energy
efficient performance, internet connectivity, and security.
Intel's current enterprise solutions can save 90% on energy
costs compared to older technology, and Intel has become aware of
its need to keep its mobile products extremely energy efficient.
Their server solutions are in place to take advantage of cloud
computing trends.
In addition, Intel predicts growth from cloud computing, mobile
computing, the embedded market, and connected TVs.
Risks
Intel faces economic risk as a cyclical company, along with
currency risk, and the constant risk of technical obsolescence.
Litigation is a common risk for Intel. 2009 results reflected a
$1.45 billion fine from the European Commission due to claimed
violation of competition laws. $1.25 billion was paid to AMD to
settle all legal issues between the two semiconductor companies. In
addition, both the U.S. Federal Trade Commission and New York
Attorney General filed antitrust suits against Intel.
Conclusion and Valuation
In conclusion, I feel that Intel deserves a fairly low valuation
until it can demonstrate that:
- Its acquisitions and general capital allocation are
beneficial for shareholders in the long-term and
- It can gain market share in the mobile computing arena
In the meantime, however, I feel that Intel is fairly priced and
pays a good dividend. With a great balance sheet, huge research and
development capabilities, and a diversified business, Intel seems
to have more going for it than against it. It's a safer pick than
many tech companies, but I alert investors to the fact that this is
an immensely complicated company and that intelligently investing
in Intel requires significant understanding of the industry as well
as strong opinions about their current path.
Disclosure:
As of this writing, I own shares of TXN, but not INTC or MSFT.
See also
In Defense of Google's Groupon Acquisition
on seekingalpha.com