Intel Corporation (NASDAQ:INTC), the world's largest chipmaker, has been late to the fast growing market of tablets and smartphones. However, Intel has an ambitious program to gain market share in the strong growing mobile market. According to Intel, it is on track to meet its 40 million unit tablet goal for 2014. In the first quarter of 2014, Intel shipped five million tablet processors, and in the second quarter the company provided processors for 10 million tablets. However, the financial results of this Intel's segment show a big decline in net revenue and a big increase in operating loss, as shown in the charts below.
Data: Intel's quarterly reports
Intel's stock rose 9.3% on July 16, after the company reported better than expected results, raised its annual revenue forecast and added $20 billion to its stock-repurchase plan. Moreover, Intel's stock has surged strongly this year. In fact, its relative strength index [RSI] technical indicator is indicating overbought conditions. Since the beginning of the year, INTC's stock has gained an astounding 33.5%, while the S&P 500 index has increased 7.2%, and the Nasdaq Composite Index has risen 6.0%.
Nevertheless, considering its good valuation metrics, its good earnings growth prospects, and its leading position in the industry, Intel's stock is not expensive. In my opinion, it still has plenty of room to move up, mainly because the demand for personal computers is growing again. After a noteworthy slump in PC sales, mainly due to the growing popularity of tablets, the demand for personal computers is rising driven mostly by strong demand for business PCs. Despite the disappointing mobile results so far, considering its financial and technological extensive resources, I believe that Intel will be able to fulfill its goal in this fast growing market. Furthermore, Intel is returning value to its shareholders by an aggressive stock buyback program and by increasing dividend payments.
The table below presents the valuation metrics of INTC; the data were taken from Yahoo Finance and finviz.com.
Intel's valuation metrics are good; its forward P/E is not high at 16.27, and its total debt to equity ratio is low at 0.23. Intel's Enterprise Value/EBITDA ratio is very low at 7.37, and it is also a low rate compared to its historical values. According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street", Mr. O'Shaughnessy demonstrates that 46 years back-testing, from 1963 to 2009, have shown that companies with the lowest EV/EBITDA ratio have given the best return. Mr. O'Shaughnessy explains that EV/EBITDA is a better way to assess value-that is, how cheap or expensive it is-than looking at the P/E ratio alone.
Latest Quarter Results
On July 15, Intel reported its second-quarter 2014 financial results, which beat EPS expectations by $0.03 (5.80%), beat on revenues, and raised guidance range.
The company reported second-quarter revenue of $13.8 billion, operating income of $3.8 billion, net income of $2.8 billion and EPS of $0.55. The company generated approximately $5.5 billion in cash from operations, paid dividends of $1.1 billion, and used $2.1 billion to repurchase 74 million shares of stock.
In the report, Intel CEO Brian Krzanich said:
Our second-quarter results showed the strength of our strategy to extend the reach of Intel technology from the data center to PCs to the Internet of Things. With the ramp of our Baytrail SoC family, we have expanded into new segments such as Chrome-based systems, and we are on track to meet our 40 million unit tablet goal. In addition, we hit an important qualification milestone for our upcoming 14nm Broadwell product, and expect the first systems to be on shelves during the holidays.
A comparison of key fundamental data between Intel and its main competitors is shown in the table below.
Intel has the lowest EV/EBITDA ratio, the lowest debt to equity ratio and the highest dividend yield among the stocks in the group.
Intel's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.
Dividend and Share Repurchase
Intel has been paying uninterrupted dividends since 1993. The forward annual dividend yield is at 2.60% and the payout ratio at 48%. The annual rate of dividend growth over the past three years was at 7.5%, over the past five years was also high at 7.4%, and over the past ten years was very high at 25.6%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and INTC's performance has been satisfactory in this respect.
Source: Charles Schwab
Since the company generates lots of cash, has a low debt and the payout ratio is relatively low, there is an excellent chance that the company will continue to raise its dividend payment.
In its latest report, Intel announced that it intends to return more cash to shareholders by lowering its cash balance further through increased share repurchases. The board of directors authorized an increase of $20 billion to its share repurchase program and the company is forecasting share repurchases of approximately $4 billion in the third quarter, with additional share repurchases in the fourth quarter. Intel repurchased 76 million shares in 2Q14 and 22 million in 1Q14. Intel repurchased $2.1 billion of its stock in 2013. Share repurchases totaled $5.5 billion in 2012 and approximately $10 billion in 2011. Over the last decade, Intel has returned almost $90 billion to shareholders through dividends and share repurchases.
The charts below give some technical analysis information.
The INTC stock price is 11.66% above its 20-day simple moving average, 20.68% above its 50-day simple moving average and 35.65% above its 200-day simple moving average. That indicates a strong short-term, mid-term, and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.66 and ascending, which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 86.67 which indicate strong overbought conditions.
Many analysts are covering the company but their opinion is extremely divided. Among the 46 analysts, 7 rate it as a Strong Buy, 9 rate it as a Buy, 24 analysts rate it as a Hold, 4 rate it as an Underperform, and two analysts rate is as a Sell.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering INTC stock there are 29 analysts who have the four or five star rating, 16 of them recommend the stock, 12 top analysts have a Hold rating on the stock, and one analyst rates it as a Sell.
On July 15, Deutsche Bank's analyst Ross Seymore and associate Matt Diamond increased their price target for the chip maker from $35 to $40 per share and reiterated their Buy rating. They called Intel's second quarter results "strong" and noted that the company's third quarter guidance exceeded expectations. They are now more confident in their bullish view on the company, which they say is based on improving demand, conservative guidance and improving cash generation.
I consider Mr. Seymore's analysis very valuable, since he has 5-Star rating from TipRanks for the accuracy of his previous calls.
As the world's leading manufacturer of microprocessors for personal computers, INTC will benefit from the rising demand for personal computers. Intel has good valuation metrics and good earnings growth prospects; its Enterprise Value/EBITDA ratio is very low at 7.37. Furthermore, Intel is generating strong cash flows, and it returns value to its shareholders by boosting its stock buyback program and by increasing dividend payments. All these factors bring me to the conclusion that INTC stock is a smart long-term investment.
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.