Intel (INTC) is starting to appear on the 2014 Top Stock Picks that we frequently see at this time of year, including this week's Barron's, which has selected Intel as one of its Top 10 stocks to outperform in 2014.
We've been long the stock for a while and have written numerous articles on the stock, due to its attractive cash-flow valuation, and have been exactly wrong in INTC for a while.
With Friday, December 6th's close near $25, INTC is actually up 20% year-to-date (excluding the dividend), which isn't too shabby, except that the stock continues to underperform the SP 500.
In 2012, INTC's total return was -15% (excluding the dividend), which was a far greater underperformance relative to the benchmark than Intel's 2013 return.
However, truth be told, it is still underperformance.
So what is holding INTC back, even with the Nasdaq up 34% year-to-date as of November 30, 2013?
Intel's big drag, or perhaps its fatal flaw, is its annual "capex" requirement, or the investment in fab's required to maintain not just its technological edge, but the economics of its business.
Here is a table of Intel's cash-flow, capex, and over the last 5 years, or 20 quarters:
|CFFO||y/y gro||Capex||Capex % cash-flow|
CFFO = 4qtr trailing cash-flow from operations
y/y gro = year-over-year growth
capex - 4qtr trailing capital expenditures
The casual reader might ask, "this data is interesting (not), but why should I care ?"
Back in the mid 2000's we were invited to a growth stock conference, here in Chicago and heard Jim Flaws speak, Jim, at the time was CFO of Corning (GLW), and still is I believe. He made an interesting statement that day about GLW (and I'm paraphrasing a little bit). When asked by an analyst at the table about the GLW's cash-flow and the potential dividend or share repurchase, Jim answered, "Corning has the highest percentage of capex-to-cash-flow (or maybe revenues) of any large-cap tech company outside of Intel." The conclusion to be drawn by anyone at the table that day was that don't expect much return of capital from GLW given the capex requirement.
Personally I think INTC has done a fabulous job generating free-cash-flow in the last 5 years, particularly with the death of the PC market within in Corporate America.
The dividend is quite nice at 3.80%, and Intel does still repurchase stock, but the whole point of the above analysis being that, companies with large capex requirements, that have to reinvest in their business as consistently and to the large degree that Intel does, are essentially running uphill with a piano on their backs.
(By the way, INTC's annual dividend in terms of total dollars is now half of its free-cash-flow. The point we've made in previous articles on INTC is that personally I'd rather see the company spend more on share repurchases.)
Technically, Intel's chart doesn't look too bad, with the stock range-bound between $20 and $30 for the last 10 years (for the most part).
Recently, Brian Krzanich said that he thought Intel might need to do more contract manufacturing, and I immediately thought of the capex load, and if this was a way for Intel to drive more volume over their fixed-cost base, and thus grow earnings at a faster clip.
I am not a technologist, which implies that I unfortunately cannot tell you the finer points of this chip versus that microprocessor or this fab, versus that foundry, but being a financial analyst, I am familiar with operating leverage and capex, have worried over the years if that heavy capex load was a deal-killer for the stock.
(By the way, and not as a casual aside, when we heard Jim Flaws speak in 2003 - 2004, GLW was trading between $15 - $20 per share. On Friday, GLW closed at $17. )
We remain long 98% - 99% of our Intel position we've detailed over the last few years. in the last 23 months, INTC is up about 5% versus the over 40% return for the SP 500.
Something needs to give. INTC's valuation is still very reasonable, but it could be cheap for a reason.
Here are some other articles we've posted about INTC:
Expectations about Tablet and Mobile chips are expected to drive the stock in 2014, per the latest Barron's article. The poor guidance off the October, 2013 earnings call, put a lid on the stock until just this last week, when the stock received a bunch of upgrades.
Our plan is to remain with the stock until at least the January '13 earnings call, and evaluate the 2014 guidance, both in terms of earnings (EPS) and capex guidance.