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Summary

  • Intel's lack of growth has been well understood and punished by the investors.
  • The company's margins have been trending downwards for a while, and the revenues have been flattish at best.
  • The company is trading for a cheap multiple in terms of net earnings and cash flow.
  • Investors don't expect much from this company, and any surprise to the upside might be rewarded handsomely.

Intel (NASDAQ:INTC) is one of the most highly debated stocks in the market. There are plenty of people on both sides of the argument, while the stock continues to trade at a restricted range. In fact, Intel's range restriction has been going on for more than a decade, as the company's share price has been ranging from the high-teens to mid-twenties.

INTC Chart

After the company announced its latest results, the downtrend in revenues became more visible. For the last couple years, Intel has been unable to see revenue growth, even though the company has been in a constant-reinventing-itself mode. Obviously this hasn't worked well in the recent years, as Intel couldn't compensate for a falling PC business by establishing itself in alternative markets.

INTC Revenue (<a href=

After taking two big jumps in the early-to-mid 2000s and the post-recession period, the company's net earnings came to a meaningful slowdown, and things have yet to improve. In fact, the last quarter's results confirmed the weakening trend for the company. In the last twelve months, Intel earned a net income of $1.86 per share, which is considerably below a recent peak of $2.32.

INTC EPS Diluted Chart

During its public history, Intel traded for anywhere from 1.30 times its annual sales and 16.25 times its annual sales. The historical average for this metric has been ranging from 3 to 4, with the exception of outliers. The company's current price-to-sales ratio of 2.53 is definitely below the historical averages, and this shows us that the investors don't have much belief that the company will be able to increase its revenues in any meaningful manner anytime soon.

INTC PS Ratio Chart

Intel's current P/E ratio of 14.04 and the company's current normalized P/E ratio of 13.77 are below the historical average of 20. On the other hand, this value hasn't passed 15 since the end of the last recession, and many people are highly doubtful that Intel will ever see a P/E of 15 again unless the company starts increasing its revenues and profitability. While the company's P/E ratio has been rising for the last couple years, this trend has already slowed down considerably in the last quarter. As the market is nearly at the peak and the QE losing steam, it is difficult to determine whether Intel can see P/E expansion anytime soon.

INTC PE Ratio Chart

Intel's margins have been swinging up and down from quarter to quarter. While the last quarter's gross margin of 59.64% is considerably higher than the historical average of 52-54%, it's been trending down from a recent high of 67.40%. At the current rate, the company's gross margin has room to go in both directions, and it is next to impossible to predict where the move is going next. If Intel can increase its revenues in a meaningful way, the margins are more likely to go up than down, though.

INTC Gross Profit Margin (Quarterly) Chart

When we look at the company's operating and net profit margins, we see a scary trend. Notice that the company's operating and profit margins have been falling almost consistently since 2011. Shortly after recovering from the great recession, Intel enjoyed operating margins as high as 36% and net profit margins as high as 27%, while the company's current operating margin sits at 20% and the net profit margin sits at 15%. These trends, mostly caused by a weakening PC market, have definitely hurt Intel's profitability over the last few years. In the recent years, Intel increased its research and development expenditures, which also hurt the company's profitability; however, this will hopefully result in improved products and better financials in the long run.

INTC Profit Margin (Quarterly) Chart

While Intel's net profits did not rise greatly over the last few years, things look a lot better when we look at them from a cash flow perspective. In the last 12 months, Intel generated $20.00 billion of cash flow from its operations, and this is well above the historical averages. In fact, just a few years ago, the company's operating cash flow was below $10 billion, as it was recovering from a recession. Even before the recession, the company's operating cash flow rarely passed $12 billion, which makes today's numbers look good.

INTC Cash from Operations Chart

Currently, Intel trades for 6.69 times its operating cash flow. This figure was almost as low as 5 last year; however, this should not fool anyone. Intel's historical price-to-cash flow from operations ratio is closer to 10-12 range, and the current price offers a significant discount to this. In fact, the chart below will show you that the company's price-to-cash flow from operations metric has been trending downwards for the last decade almost consistently.

INTC Price to CFO Per Share Chart

Speaking of cash flow, we should also talk about the company's dividends. The company hasn't increased its dividend payments in a long time, and many investors are growing anxious about this. The company currently enjoys a decent yield of 3.44%, which is above the historical average of 2.50%; however, this is mostly due to the lack of appreciation in the stock price. If the stock price does not appreciate by much, the dividend yield will not fall by much, even if the dividend payments might be flat over time. Many people don't even consider Intel as a dividend champion anymore, because dividend champions tend to raise their dividend payments consistently over the years. Unfortunately, Intel has very little room for a dividend increase without actually improving its margins and increasing its net profits.

INTC Dividend Yield Chart

Historically, Intel has been very big on stock buybacks. In the last decade, the company reduced its diluted share count from 6.6 billion to 5.1 billion through stock buybacks. This has also helped with the company's EPS growth; however, the stock buybacks have been insufficient in the last couple years. In fact, last year, the company's share count rose slightly because its share buyback could not even offset the stock-based employee compensation. If this trend continues, investors will not be very happy.

INTC Average Diluted Shares Outstanding (Quarterly) Chart

How about the future? The next two charts will show you that the analysts are very hopeful about the future of Intel. In particular, the analysts see a margin expansion in the company's near future. In the next two years, the analysts see the company increasing its revenues from $52.71 billion to $54.46 billion, which is an increase of 3.32%. On the other hand, the same analysts expect the company to grow its net earnings from $1.89 per share to about $2.10, which is an increase of 11.11%. If a company is expected to improve its sales by about 3% while improving its profits by 11%, the analysts are talking about some meaningful margin expansion.

INTC Sales Estimates for Current and Next Fiscal Year Chart

INTC EPS Estimates for Current and Next 3 Fiscal Years Chart

So, back to the question: how much hope is built into Intel's stock price? In the last couple years, the company's growth has been non-existent, and the investors are fully aware of this. In fact, the company's current price reflects this, and the investors don't really expect much from Intel anytime soon. The current low price-to-earnings and price-to-cash flow tells us that the investors see Intel with flat earnings for the foreseeable future. At a time the stock period rallied relentlessly, Intel's stock was left behind. At this point, if the company can meet the analyst estimates and grows its earnings, the investors will be happy. The current price reflects that the expectations are very low for Intel in the near future.

Source: How Much Hope Is Built Into Intel's Stock Price?