I love dividends. Not only do they provide a floor for a stock's price, they also indicate a company that has consistent earnings and a solid industry position. Additionally, in a low rate environment, any dividend yield above the prevailing 10-year treasury is attractive. So when Intel (NASDAQ:INTC) announced it was expecting an increase in its sales earlier today, I took a look at its fundamental position to see if it looked like an attractive investment.
Let's start with the company's industry position. According to the Finviz website the company belongs to the semiconductor broad line industry and its market capitalization is $139.18 billion, making it over 2.5 times the size of the nearest competitor, Texas Instruments (NASDAQ:TXN). Intel has gross sales of $52.89 billion, which is 4.3x the size of TXN (whose gross sales were $12.3 billion). This means that while comparing the performance to the industry will be helpful, we should also remember the company is really in a unique position.
The industry has a PE ratio of 21 while INTCs is 15, indicating it is under-priced via that particular metric. At the same time the company is over-priced via the price to sales metric and about evenly valued at price to book.
However, it's from a margin perspective that Intel really shines. Remember that as the biggest player in the semiconducter field, it is in a position to extract large concessions from suppliers. This ability is evident in its margins as it has a gross, operating and net margin of 60.63%, 22.95% and 17.95% - all far above the industry average. These are the kinds of margins that allow the company tremendous financial freedom relative to its competitors.
Their cash flow statement is solid. In 2011, 2012 and 2013 the company generated $20.7, $18.8 and $20.9 billion in cash from operations, which more then covered its primary investment activity of adding to plant, property and equipment at a pace between $10 and $11 billion per year. Like most companies with excess cash, it has invested a larger than usual percentage of its liquid assets in securities, which accounts for the bulk of its remaining investment activities. The majority of the financing activities have gone to dividend payments and share buybacks over the last three years.
Intel has liquid assets of $18 billion and $20 billion in 2012 and 2013, which more than covers short-term liabilities for both years (which were $12.8 and $13.5, respectively). The company only has $13.1 billion in long-term debt, which is also more than covered by its liquid assets, let along total assets. The company has net equity of $51.2 and $58.2 for 2012 and 2013. The bottom line is its cash flow and balance sheet are in great shape.
The problem has been revenue, which has declined from $53.9 billion 2011 to $52.7 billion in 2013. Overall, this represents a decline of only 2.2%. At the same time, operating expenses have increased 18%, lowering the operating margin from 32% in 2011 to 23% in 2013. There has also been a decline in net margin from 23.9% to 18.2%. None of these are fatal, especially considering the cash flow, but the decline is probably a big reason for the stock's underperformance over the last few years.
The company's biggest problem is it derives a large percentage of revenue from PC sales, which are in a slight decline:
The stock today jumped as much as 7.5 percent to $30.06, the highest intraday level in 10 years, after the world's largest semiconductor maker raised its second-quarter revenue forecast yesterday after the markets closed. Intel also said annual sales will increase for the first time since 2011, buoyed by improving business demand for personal computers.
The higher forecast provides another hint of optimism in the PC industry, where Intel gets most of its revenue, after two straight years of declining global shipments. Even as consumers shun PCs in favor of mobile devices, demand for Intel's microprocessors is getting a lift as companies replace aging computer systems, said Ian Ing, an analyst at MKM Partners.
"In the short to medium term, it looks like the market has stabilized, and business and corporate PCs are driving a lot of strength," said Ing, who has the equivalent of a hold rating on Intel stock. "It's really a nice positive for them, even without needing the consumer to come back yet."
Intel's chips power more than 80 percent of the world's PCs, so for now the company remains dependent on that market. To keep revenue growing beyond this year, Intel will have to win business in handheld devices or woo more consumers back to PCs, said Cody Acree, an analyst at Ascendiant Capital Markets LLC.
Only time will tell if Intel can make serious in-roads into the tablet and mobile phone market.
However, PCs aren't going anywhere. And while their popularity may be down, they are still a big component of corporate America, thereby giving Intel a market. And they are clearly THE layer in that market. As such, this is an attractive stock, especially given the increased sales forecast.
As with anything you read on this blog, this is my opinion, worth exactly what you pay for it. In other words, do your own research and come to your own conclusion.