A Few Thoughts About The Intel Earnings Report

Jul.16.14 | About: Intel Corporation (INTC)


New record high sales.

New record unit sales.

Return to growth.

Intel (NASDAQ:INTC) announced second quarter 2014 earnings after the market close Tuesday.

Nice quarter; $13.8 billion, 64.5 gross margin, 20.2% net margin.

The business outlook is great. The company now expects revenue for the full year to grow 5% over last year. That would make 2014 a new record revenue year at $55.3 billion. Expected full year gross margin is now expected to be 63%.

I find it curious that no analyst commented on the expected record year.

$55 billion and 63% gross margin is an incredible set of numbers. Embedded in those numbers are about a $7 billion loss in the mobile, communication, and "other" groups. If we could flip a switch and make the sales of those operations go away and add the losses to gross margin, the margin would be in the neighborhood of 78%. A very nice neighborhood, indeed.

Depreciation will be about $7.5 billion. The Intel depreciation schedule for equipment is 2-4 years. CapEx that is not capitalized can be found in R&D. Depreciation and R&D combined is nearly $19 billion per year. When Moore's Law hits a wall, Intel could see a reduction in these costs that could add $3/share in operating earnings from cost savings on top of the $4/per share of "operating" operating income.

Two years after the crazy levels of Capital Expenditures decline to more normal levels, Intel could be earning $7/share in operating income per share, or $5+ net EPS.

For now CapEx will continue at about $11 billion per year until all foundry suppliers to Intel's competitors can no longer match that level of spending.

Intel added $20 billion to their share buyback program with an accelerated execution of the buyback of $4 billion for the third quarter and a similar amount for the fourth quarter. At that rate, and today's price, 5% of the outstanding shares will be retired in two quarters. This rate of buyback has only been matched in a couple of quarters in 2011. There seems to be some sense of urgency in getting the shares bought in.

I could go on, but the numbers are available to anyone. The bottom line is that Intel is a uniquely profitable company of immense size with a scale of technical capabilities unmatched in the American business universe.

At a 5% growth rate and 20% net margin, Intel is reasonably worth four times leading revenue or $44 and change per share. It is worth that amount today, not some time in the distant future.

In the distant future, that 78% real gross margin will lead to a net margin of 35%, making Intel worth seven times revenue or $77/share, more if the shares outstanding shrink at the current rate.

Fortunately, I am very long Intel shares and call options.

The "Intel Show" is just beginning. I know that because the Fast Money guys on CNBC recommended selling the shares. They also recommended selling Micron (NASDAQ:MU) at $10 and $15, and $20 and....you get the idea.

Disclosure: The author is long INTC. 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.