Shares of Intel Corporation (INTC), the largest semiconductor manufacturer fell 3.1% in after hours trading as the company published its first quarter results.
First Quarter Results
Intel reported first quarter profits of $2.7 billion, or $0.53 per share which exceeded analyst expectations. Consensus estimates for the quarter was that the company would report earnings of $0.51 per share. Revenues came in at $12.9 billion, unchanged compared to last year and slightly ahead of the $12.83 billion consensus.
Intel has fallen behind in the mobile computing market where it competes with ARM (ARMH) and Qualcomm (QCOM) to provide Google's Androids phones with their chipsets. Analysts expect Intel to recover from the weakness in 2011 mainly caused by the floods in Thailand. The resulting shortage in components resulted in steep price increases and depressed revenues across the sector.
CEO and President Otellini noted that "The first quarter was a solid start to what's expected to be another growth year for Intel".
Second Quarter Outlook
For the current quarter Intel expects revenues to come in between $13.1-$14.1 billion. The revenue guidance is in line with analyst expectations which expected the company to report revenues around $13.4 billion. The stronger than expected outlook for the second quarter comes as Intel expects demand to catch-up from a disappointing first quarter when it still faced shortages in components.
Valuation
The company ended its first quarter with some $9.4 billion in cash and short term investments and had about $7.4 billion in short and long term debt outstanding for a net cash position of $2 billion. Factoring in the 3% decline in after hours trading, Intel is valued at some $138 billion which represents a 2.6 times annual revenue multiple and a mere 10.5 times 2011's full year earnings.
The company trades at similar revenue multiple compared to other chip producers such as Texas Instruments (TXN) and Broadcom Corp. (BRCM) however it trades at a sizable discount in terms of its earnings multiple.
During the first quarter Intel used the lower valuation to buy back roughly $1.5 billion in stock on top of the $0.21 quarterly dividend it pays which already represents a 3.0% annual dividend yield
Investment Thesis
Just like the rest of the market, shares in Intel have rallied over the last couple of years as the economy has slowly been recovering. Shares have more than doubled from lows of $13 per share in 2009 and trade near the highs over the last decade.
The company has engaged in a very friendly shareholder strategy as it has repurchased a lot of shares over the last years. As recent as 2008 it had about 5.8 billion shares outstanding, a number expected to fall below 5 billion this year.
Repurchasing undervalued shares is a very good strategy for shareholders who should applaud the move. In case any of Intel's smaller competitors becomes a serious threat to the core business of the company it has sufficient financial resources to make a decisive acquisition. Patience and a breakthrough in mobile devices could act as major triggers for the shares in the coming years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
