Intel's (NASDAQ:INTC) strengths and weaknesses are the focus on this article, with a comparison also being made to Qualcomm (NASDAQ:QCOM). We're comparing the two companies because they operate within the same GICS sector of information technology and also within the same GICS sub-industry of semiconductors. Although the two stocks have markedly different market caps (Intel's is $164 billion, while Qualcomm's is $125 billion), they are the two largest stocks in their GICS sub-industry and, with many investors apportioning their capital based upon GICS sectors and sub-industries, we feel the comparison is worthwhile and, we hope, useful to investors.
Perhaps the first point to note is that neither Intel nor Qualcomm is forecast to deliver strong growth next year. Indeed, although Intel's bottom line is expected to increase at a higher rate than that of Qualcomm, it nevertheless remains disappointing. For example, Intel is forecast to see EPS increase by just 5.1%, while Qualcomm's number is even lower at 4.5%. This is slightly disappointing and shows that neither stock offers particularly attractive amounts of short-term upside.
Despite this lack of growth, both Intel and Qualcomm remain, as you'd expect, hugely profitable. Last year, for example, Intel delivered return on equity of 18.2% which, although impressive on its own, is made even more so by the fact that Intel runs very low debt levels on its balance sheet. Indeed, its debt to equity ratio currently stands at just 23%, which we would consider to be very low and very attractive given that the interest rate cycle is at its lowest ebb.
However, Qualcomm outdoes its sub-industry peer in terms of return on equity, with it posting a figure of 18.7% last year. Furthermore, Qualcomm runs next to no debt on its balance sheet, which makes it more difficult for the company to post a strong return on equity number (since its capital structure is made up almost entirely of equity, it must distribute profit among its entire capital structure to give a return on equity figure).
So, while we're impressed with Intel's profitability, we're even more impressed with Qualcomm's, and, with regard to return on assets, Qualcomm again pips its peer. That's because, while Intel is clearly making highly efficient use of its asset base as shown through a return on assets number of 9.8%, Qualcomm does one better through a figure of 10.2%. This means that Qualcomm is doing a slightly better job than Intel at squeezing profit out of its asset base.
Intel and Qualcomm have huge potential as income stocks. That's not necessarily because their yields are hugely attractive right now (although they aren't bad), it's due to their potential going forward. Indeed, Intel pays out just 45% of its profits as a dividend, while for Qualcomm the figure is even lower at just 33%. Despite this, Intel still manages to offer a forward yield of 3% to investors, while for Qualcomm this is understandably lower at 2.1% due to its lower payout ratio. It is clear, though, that there is more to come in terms of dividend per share payments for both companies, which is why we feel that both Intel and Qualcomm could realistically be classed as income stocks going forward.
Despite having considerable income potential and high levels of profitability, Intel appears to be overvalued relative to its sub-industry peer. For instance, it currently trades on a forward P/E ratio of 14.5, which is higher than that of Qualcomm, which has a forward P/E of 13.5. Furthermore, looking ahead, Intel's 5-year PEG ratio is 1.7, which may not seem high until Qualcomm's 0.9 figure is taken into account. That's 47% below Intel's five-year PEG ratio, which in our view indicates that Intel may be overvalued at current price levels when compared to its sub-industry peer. As a result, we feel that Intel could underperform Qualcomm going forward.
Although we're impressed with Intel's profitability, as well as its low levels of financial gearing and considerable income potential, we feel that it may be overvalued relative to its sub-industry peer, Qualcomm. Indeed, both companies are set to struggle with bottom line growth in the short term, which is disappointing, although looking further out highlights that Intel could be overpriced due to it having a significantly higher five-year PEG ratio than Qualcomm, in addition to its forward P/E ratio being higher. As a result, we feel that Intel could underperform Qualcomm going forward, as the market moves to correct what appears to be a mispricing with regard to Intel's share price.
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.