When Intel (INTC) reports their 2nd quarter, 2013, financial results after the market closes on Wednesday, July 17th, 2013, we will be able to discern if the recent downgrade of INTC by the Evercore analyst was one of the worst calls ever, or if there is more pain to come from those sucked in by the attractive valuation, and the "cachet'" of INTC.
Analyst consensus expectations for the 2nd quarter, 2013 is for $0.39 in earnings per share (EPS) on $12.89 billion in revenues for expected year-over-year declines of 32% and 5% respectively.
Since the last earnings report in April 13, both the revenue and earnings estimate have remained stable and have not been revised lower during the quarter, which is a plus.
In Q1 '13, INTC revenues fell 3% year-over-year (y/y), while EPS fell 29%, which was better than expected, and more importantly, Q2 '13 guidance was inline with expectations.
INTC preannounced negatively and cut guidance in September 12, which was consistent with the collapse of the PC market thanks to a very slow Windows 8 launch and the explosion of tablets, which means the stock and the company will be lapping far easier comparisons in the 2h '13 than in the first half of 2013.
INTC is up about 10% year-to-date as of this writing, which doesn't include the dividend. The stock has dramatically underperformed the S&P 500 over the last year.
In fact, with the exception of the 2008 - 2009 Financial / Mortgage Crisis, INTC has traded between $19 and $30 per share for almost 10 years.
And therein lies the eternal optimism: is there so much bad news around the PC business (still 64% of INTC's revenues per one source) and with a new CEO, that the stock might get a lift in the 2nd half of 2013?
The positives for being long INTC:
1.) 5(x) - 6(x) cash flow valuation and 10(x) free cash flow. We've modeled the company since the mid 1990's and I've never seen the stock trade this cheaply on a cash flow basis;
2.) The fact that Q2 '13 guidance was in-line, and it appears that forward EPS and revenue estimates have been stable for the last 3 months, could indicate the bottom is starting to get formed for the iconic chipmaker;
3.) At $22 per share, INTC's dividend yield is 3.5% - 4% and probably more stable than much of the bond market going forward;
4.) A note out of Deutsche Bank after Q1 '13 earnings noted that INTC was "rapidly gaining tablet market share," which would be a plus.
The negatives for being long INTC:
1.) Lack of a mobile strategy, although Trefis noted in a July 9th analyst note that INTC has overhauled the Atom processor to better work in the mobile space;
2.) INTC is still tied to the PC business;
3.) There has been little interest in a mass corporate upgrade to Windows 8 so far;
4.) With the PC business thought to be in secular decline, and INTC's capex being 50% of cash flow, the company has to run hard to remain in place on the microprocessor and semiconductor food chain.
The downside of value investing is that an investor often has to wait for the catalyst to push the stock higher.
I actually think that INTC should forego future dividend increases, and spend more of that free cash flow repurchasing stock. Since March 2000, or the approximate peak of the technology boom, INTC has reduced their fully diluted outstanding share count from 7 billion to 5 billion shares.
INTC's annual dividend (in dollars) has risen from $3 billion in 2009 to just under $4.4 billion (using 4-quarter trailing data), which given today's share price would represent 200 million shares or roughly $0.02 per share per quarter. $0.08 to $0.10 a year doesn't sound like much, but it adds up after a few years, particularly when your EPS is stuck in a range between $1.80 and $2.25 per share for many years.
INTC currently has $4.8 billion left in their current share repo program, and they typically repo between $500 million to $1.5 billion per quarter.
INTC is currently expected to earn $1.87 and $2.02 for 2013 and 2014 for expected y/y growth of -12% and 8% respectively, on no revenue growth in 2013 and just 4% in 2014.
We think INTC is worth $30 per share, with Morningstar having an intrinsic valuation on INTC of $26 per share. However, to get there I think we need to see PC growth of low single digits, and we would need to see INTC's earnings and revenue estimates start to grow year-over-year again, even if at a low-to-mid single digit annual rate.
The full-year 2013 EPS and revenue estimate of $1.87 and $53.5 billion must NOT be revised lower after earnings. We think Q3 '13 will be a seasonal quarter, with much of how the stock reacts next Wednesday coming from how analysts interpret potential Q4 '13 and full-year guidance.