Intel Corporation - Awaiting A New CEO And Future Growth

Apr.17.13 | About: Intel Corporation (INTC)

Shares of Intel Corporation (NASDAQ:INTC) are trading with gains of 1.5% in after-hours trading on Tuesday, following gains of 2.5% during the regular trading session. The chip manufacturer announced its first quarter results for its fiscal 2013 after the market close.

First Quarter Results

Intel generated first quarter revenues of $12.6 billion, down 2.5% on the year before, and down 6.7% compared to 2012's fourth quarter revenues. Revenue declines were driven by the slump in the global personal computer market. PC Client Group revenues fell 6.0% compared to a year earlier, coming in at $8.0 billion. Data Center Group revenues rose 7.5% to $2.6 billion, but fell sharply compared to fourth quarter revenues. Total revenues came in line with consensus estimates.

The slowdown in revenues had a dramatic impact on gross margins, which has already been communicated by the company. First quarter gross margins came in at 56.2% which is down 180 basis points compared to the fourth quarter of 2012. Gross margins fell an astonishing 780 basis points compared to a year ago.

Consequently, operating income fell some 34% to $2.52 billion. As a result of lower taxes, net income fell merely 25% to $2.05 billion. Earnings per share fell by a similar percentage to $0.40 per diluted share, missing consensus estimates by a penny.

CEO Paul Otellini commented on the results:

Amidst market softness, Intel performed well in the first quarter and I'm excited about what lies ahead for the company. We shipped our next generation PC microprocessors, introduced a new family of products for micro-servers and will ship our new tablet and smartphone microprocessors early this quarter. The transition to 14nm technology this year will significantly increase the value provided by Intel architecture and process technology for our customers and in the marketplace.

Outlook

As important, or even more important than Intel's recent performance are the forward looking statements discussed during Intel's earnings calls. For the current second quarter, Intel expects to generate revenues of $12.5 billion, plus or minus half a billion. At the midpoint of this range, revenues are expected to fall 7.4% compared to last year, and 1% compared to first quarter revenues.

Gross margins are expected to recover to 58%, plus or minus a couple of percentage points.

Intel still sees its full year revenues up in the low single digits, while gross margins are expected to come in around 60%.

Valuation

Intel Corporation ended its first quarter of its fiscal 2013 with $17.0 billion in cash, equivalents and marketable securities. The company operates with $13.2 billion in short- and long-term debt, for a net cash position of roughly $3.8 billion.

Factoring in a low single digit growth rate in revenues for the full year of 2013, Intel could generate annual revenues of approximately $55 billion for this year. As gross margins will come in below the 62% generated last year, net income could come in around $8-$10 billion.

Factoring in a 1.5% move upwards in after hours trading, the market values Intel around $110 billion. This values operating assets of the firm at roughly $106 billion. As such, assets are valued at 1.9 times annual revenues and 11-12 times 2013's expected annual earnings.

Intel pays a fat quarterly dividend of $0.22 per share at the moment, providing investors with a 4.1% dividend yield.

Some Historical Perspective

The slump in the personal computer market is giving Intel some headwinds in recent times, depressing the share price performance. After shares peaked around $75 in 2000, the company has traded in a wide $10-$30 trading range ever since. Despite the strong market returns over the past year, shares are down more than 20% compared to spring of 2012 as the personal computer market is shrinking more rapidly than expected.

While Intel is expected to increase its total revenues from $35 billion in 2009 to some $55 billion in 2013, net income has come under severe pressure. The slump in the PC market impacts gross margins and makes the reported $13 billion profit for 2011 unattainable in the short to medium term. To ease the pain for shareholders, the company has retired roughly a tenth of its shares outstanding over the past four years.

Investment Thesis

Shareholders are relieved that Intel did not surprise the market with yet another disappointing update. The market grew especially nervous after market research company International Data Corporation reported a 14% decline in global PC shipments for the first quarter of the year. Gartner warned that shipments fell by 11% for the quarter. In this light, Intel's performance still looks pretty decent.

The market is furthermore pleasantly surprised with the strict inventory control. Total inventories at the end of the quarter came in at $4.36 billion, down almost 3% on the year before.

At the moment, Intel is in full transition phase. The company expects to boost sales further into the year ahead of the Haswell launch which should boost personal computer sales. Furthermore the company will launch more data-center and client products in the coming quarters. On top of that is the rumored launch of Intel TV+ which would provide a nationwide wireless entertainment service.

On top of that is the change in management. CEO Paul Otellini is expected to retire in May of this year, and the board of directors is widely expected to name a new chief executive before the Annual General Meeting on the 16th of May.

Key for a future leader will be to focus on making new ground-breaking entrances into the mobile and the software area. It is crucial to re-ignite profitable growth which could change Wall Street's perception and valuation of the firm could entirely. A strong new hire from outside the company would be preferred.

At these levels shares are fairly valued. Yet the strong cash flows to investors, driven by sizable share repurchases and a fat dividend yield, are slowly eating into the strong balance sheet. A strong product introduction or a short-term outside successor, could act as catalyst to re-ignite the growth story and the corresponding valuation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.