Intel Is Booming

Jul.16.14 | About: Intel Corporation (INTC)

Summary

Confounding those who expected the PC to collapse, Intel reported blow-out numbers with stronger unit growth and margins.

Additionally, Intel raised full year guidance, suggesting this momentum is sustainable.

Intel will also buy back $20 billion of stock, which makes sense given its net cash position.

For several years, the death of the Personal Computer ("PC") has been a hot topic amongst prognosticators as concerns about the rise of tablets and smartphones grew. Of course, we have seen PC sales and prices fall over the years, but they still offer some functionalities that tablets lack, which has made them surprisingly sticky for enterprise. While a consumer may be able to do without Excel or heavy programs, many businesses cannot. While the PC has certainly been wounded, it isn't dead. Intel's (NASDAQ:INTC) just announced quarter proved that.

While Intel shares have rallied solidly over the past month, shares have been an underperformer for quite some time, spending years below $30. In fact, shares remain below levels they were trading in late 2003. This is because the company is still very reliant on PCs, and its mobile strategy continues to underwhelm. While mobile continues to be a problem spot for the company, Intel delivered blockbuster PC results with excellent margins and cash flow. The company also recommitted to shareholder returns, which should further improve stock performance in coming months. I expect the bias in shares going forward will be to the upside.

Intel even managed to beat consensus despite increasing guidance a few weeks ago. Intel earned $0.55 on $13.8 billion in revenue against expectations of $0.53 on sales of $13.7 billion (all financial and operating data available here). Sales were up 8% sequentially and year over year. This growth was powered by a dramatic acceleration in its PC group, which grew sales by 6% compared to a drop of 1.5% last quarter. Notebook volumes were up a truly fantastic 9%, and desktop sales were surprisingly strong, at +8%.

Thanks to stronger utilization, higher selling prices, and cost controls, gross margins jumped dramatically to 64.5% from 59.6% last quarter and 58.3% last year. With growing revenue and expanding margins, net income growth was truly fantastic, up 40% year over to year to $2.8 billion even though Intel's effective tax rate increased 3%. These strong results translated to operating cash flow of $5.5 billion, which will help Intel fund capital returns in coming quarters.

Now, stocks are indicative of expected future cash flows, not past ones. That is why it is important to note that Intel's growth was not a one quarter event as the company increased forward guidance dramatically. Next quarter, INTC should generate sales of $14.4 billion, plus or minus $500 million while analysts are looking for closer to $14 billion. Gross margins will also stay robust at 66%. For the full year, Intel will grow revenue by 5% compared to expectations of 3.5%. This should translate to about $2.15 in EPS in 2014 and potentially $2.30 in 2015.

Finally, Intel announced a blockbuster $20 billion share repurchase program that will cut the share count by at least 11% over 18 months. Next quarter, Intel plans to buy back $4 billion in stock compared to $2.1 billion this quarter. This buyback will allow Intel to dramatically cut its share count to accelerate its EPS growth. Intel carries $17.3 billion in cash against $13.2 billion in debt though much of this cash is offshore. With its steady cash flows, Intel can add some leverage to its capital structure to maintain this pace of shareholder returns. I would expect about $10 billion of debt issuance in the next 15 months to fund this buyback. With $20 billion in operating cash flow and at least $9 billion in free cash flow this year, Intel can definitely afford this incremental debt issuance. With such low rates and a stock that yields 2.8%, this is a prudent strategy.

Intel has defied the skeptics and shown that its PC business can still deliver blockbuster numbers. Importantly, strong results should continue for the balance of the year, and margin expansion will help net income. With its strong cash flow, buying back more shares make sense and will accelerate earnings growth. I expect shares to trade to $35, which is only 15x 2015 earnings. At the current valuation and with strong capital returns, Intel is a buy. I would be a buyer on these results and would add on any dip.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.