Intel Earnings Preview: Intel Needs Revenue Growth And A Note Of Caution

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 |  About: Intel Corporation (INTC)
by: Brian Gilmartin, CFA

Summary

Two consecutive quarters of revenue growth.

Old Tech working in 2014, but a lot of insiders selling?

One aspect to share - repo and cash-flow is worrisome.

Intel (NASDAQ:INTC) the semiconductor and microprocessor giant, reports its calendar Q1 '14 results after the closing bell on Tuesday, April 15, 2014.

Per Thomson Reuters, analyst consensus is looking for $0.37 in earnings per share on $12.81 billion in revenue for expected year over year decline in EPS of 8%, but growth in revenues of 3%.

The consensus EPS and revenue estimates have been relatively stable since the last earnings report in January.

For full-year 2014, analyst consensus is still looking for a 2% drop in full-year EPS from $1.89 to $1.86, and just 1% revenue growth.

Over 2014, 2015 and 2016, analyst consensus is expecting an average of 2% revenue growth and 4% EPS growth.

One interesting item that jumped out at us was that if consensus revenue is met, it will be the first two consecutive quarters of revenue growth for Intel since late 2011.

Just as this is being written, a headline over the Seeking Alpha newswire notes that Intel is closing its Costa Rican facility, in addition to announcing a 5,000-employee layoff in January and the delay of the opening of a cutting-edge fab facility in Arizona.

The Costa Rican facility is a test/assembly facility. The Arizona facility was considered a cutting-edge facility that was going to produce 14 nanometer CPUs.

There are many good contributors on Seeking Alpha that have written at length on Intel, like Michael Blair here and Russ Fischer here. Some positive, some negative, on Intel's prospects.

Given Hewlett-Packard's recent results, it sounded as if there was a bounce in PC's given the Windows XP termination and the need for some companies to upgrade, both hardware and software.

That being said, prospects for Intel's Q4 '13 were pretty high until Intel lowered guidance in its mid-January '14 call and the stock fell from over $27 to $23.50 by early February. Granted, the overall market was weak at that time, too.

Valuation: while Morningstar assigns an intrinsic value to Intel of $25 (as of last quarter), our internal model values INTC at $35 per share. Ex cash, INTC is still trading at 5.5(x) and 11(x) free-cash-flow, which is a good valuation in this market.

However, there is one element when scrutinizing the cash-flow statement and the share repo plan that makes me very nervous, and it could only be temporary:

12/31/2013

9/30/2013

6/30/2013

3/31/2013

12/31/2012

9/30/2012

6/30/2012

3/31/2012

12/31/2011

9/30/2011

6/30/2011

3/31/2011

12/31/2010

Cash from operations

$6,056

$5,713

$4,707

$4,300

$6,000

$5,100

$4,739

$2,972

$5,241

$5,241

$5,241

$4,013

$4,173

less benefits from ESO

Capital expenditure

($2,948)

($2,866)

($2,723)

($2,174)

($2,500)

($2,900)

($2,662)

($2,974)

($2,691)

($2,691)

($2,691)

($2,723)

($1,302)

Dividends paid

Free- Cash- flow

$3,108

$2,847

$1,984

$2,126

$3,500

$2,200

$2,077

($2)

$2,550

$2,550

$2,550

$1,290

$2,871

4q trailing CFO

$20,776

$20,720

$20,107

$20,139

$18,811

$18,052

$18,193

$18,695

$19,736

$18,668

$17,600

$16,532

$16,692

yoy growth rate

10%

15%

11%

8%

-5%

-3%

3%

13%

18%

22%

26%

32%

49%

4q trailing capex growth rate

$10,711

$10,263

$10,297

$10,236

$11,036

$11,227

$11,018

$11,047

$10,796

$9,407

$8,018

$6,629

$5,208

y/y growth

-3%

-9%

-7%

-7%

2%

19%

37%

67%

107%

87%

65%

41%

15%

4q trail capex as % of rev's

20%

20%

20%

19%

21%

21%

20%

20%

20%

18%

17%

14%

12%

capex as % of 4q trailing rev's

20%

20%

20%

19%

21%

21%

20%

20%

20%

18%

17%

14%

12%

Capex as % of 4q trailing CFO

52%

50%

51%

51%

59%

62%

61%

59%

55%

50%

46%

40%

31%

4q trailing FCF

$10,065

$10,457

$9,810

$9,903

$7,775

$6,825

$7,175

$7,648

$8,940

$9,261

$9,582

$9,903

$11,484

4q trailing FCF yoy gro rate

29%

53%

37%

29%

-13%

-26%

-25%

-23%

-22%

-10%

6%

26%

73%

4q trail FCF as % of rev's

19%

20%

19%

19%

15%

13%

13%

14%

17%

18%

20%

21%

26%

FCF as % of mkt cap

7%

9%

9%

8%

7%

6%

5%

5%

7%

7%

8%

9%

10%

4q trailing net income

$9,801

$9,606

$9,485

$10,458

$11,296

$12,373

$12,869

$13,086

$13,363

$13,206

$12,693

$12,390

$11,672

4q trailing CFO as % of net inc

212%

216%

212%

193%

167%

146%

141%

143%

148%

141%

139%

133%

143%

4q trailing FCF as % of net inc

103%

109%

103%

95%

69%

55%

56%

58%

67%

70%

75%

80%

98%

quarterly dividend

$1,121

$1,121

$1,123

$1,114

$1,100

$1,077

$1,077

$1,077

$1,032

$1,032

$1,032

$1,032

$876

quarterly share repo

$821

$536

$550

$533

$1,000

$1,363

$1,363

$1,363

$3,585

$3,585

$3,585

$3,585

$434

quarterly capital allocated

$1,942

$1,657

$1,673

$1,647

$2,100

$2,440

$2,440

$2,440

$4,617

$4,617

$4,617

$4,617

$1,310

4q trailing dividend

$4,479

$4,458

$4,414

$4,368

$4,331

$4,263

$4,218

$4,173

$4,128

$3,972

$3,816

$3,660

$3,504

4q trailing share repo

$2,440

$2,619

$3,446

$4,259

$5,089

$7,674

$9,896

$12,118

$14,340

$11,189

$8,038

$4,887

$1,736

4q trailing capital allocated

$6,919

$7,077

$7,860

$8,627

$9,420

$11,937

$14,114

$16,291

$18,468

$15,161

$11,854

$8,547

$5,240

capital ret'd as % of FCF

69%

68%

80%

87%

121%

175%

197%

213%

207%

164%

124%

86%

46%

Div as % of FCF

45%

43%

45%

44%

56%

62%

59%

55%

46%

43%

40%

37%

31%

Shares sold via incentive plans

$397

$397

$397

$397

$528

$528

$528

$528

$511

$511

$511

$511

4q trailing sales

$1,588

$1,719

$1,850

$1,981

$2,112

$2,095

$2,078

$2,061

$2,044

insider share sales as % of repo

65%

66%

54%

47%

42%

27%

21%

17%

14%

Click to enlarge

If we looked at INTC on a cash EPS basis, which is essentially cash-flow per share, INTC is trading at 7(x) CFFO per share.

Look at the last line of the table - that's the aspect we worry about: it looks like the exercise of incentive stock options or insider selling is starting to consume a greater and greater part of INTC's share repo plan.

INTC had been reducing its fully diluted share count outstanding for some time: From 12/31/10 to 12/31/12, INTC reduced outstanding shares from 5.7 billion to 5.1 billion. That is a nice accretion to EOS for shareholder and "shareholder friendly."

In 2013, despite a $2.4 billion share repo, fully diluted outstanding shares didn't drop that much. The reason is the share repo plan is now having to soak up those option exercises and share sales.

That isn't good for Intel, as its dividend is also chewing up about half its free-cash-flow.

To conclude, if PCs grow even low-single digits, INTC will benefit since about two-thirds of INTC's revenues and 96% of INTC's operating profit still come from the PC biz.

Will INTC ever have a presence in mobile? Why doesn't it do what Micron (NASDAQ:MU) did and make an acquisition that will put it squarely in the mobile and tablet business? But I'm a financial geek. The sector strategists can opine on the mobile partners, etc.

Intel needs to do something to generate revenue growth: revenue growth expectations for the next 3 years are 1%, 3% and 3%, respectively.

With the capital intensity of Intel's business, it had better start to dig itself out of this hole.

We own the stock as a defensive play, but it had better start to generate some offense shortly.

Thanks for reading.

Disclosure: I am long INTC, MU. 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.