Intel Continues To Deliver Solid Results And Return Cash To Shareholders

Apr.18.12 | About: Intel Corporation (INTC)

Best Idea Intel (INTC) reported another strong quarter Tuesday. Some of the financial highlights include a strong gross margin of 64% (65.1% non-GAAP), earnings per share of $0.53 (versus consensus expectations of $0.50 per share), and $3 billion in cash flow generated from operations. Additionally, during its first quarter, the company bought back $1.5 billion in stock and paid out $1 billion in dividends. Management still has the authorization for an additional $8.6 billion in share buybacks (which are value-creating at these price levels), and we think the company's excellent dividend payout (0.84 per share; 3% annual yield) could increase meaningfully in coming years. (Click to access our dividend reports). Our fair value estimate for Intel remains unchanged.

Though revenue only advanced modestly on a year-over-year basis thanks to inventory shortages of hard drives from the recent flooding in Thailand, we think there are some great catalysts in the second half of the year. For one, the chip maker expects tremendous success from its Ivy Bridge products (its newest PC processor) that will be available very soon. On the PC side, Western European and US sales continue to be soft, but Ultrabooks, which are the synthesis of notebooks and tablets, could gain tremendous mainstream adoption and drive sales of Intel's Ivy Bridge technology well into the holiday season and beyond. Plus, Windows 8, Microsoft's (MSFT) newest operating system, should be released in the back half of the year. The Windows refresh cycle usually boosts PC demand, and we think Microsoft's decision to almost entirely redesign the operating system could be a big hit with consumers that are now used to one screen with minimal scrolling. Intel also hinted that it expects strong growth in desktop demand in emerging markets, which will help ease the pain of poor growth in developed markets.

Additionally, Intel is preparing to release its first ever smartphone chip to compete largely with ARM Holdings (rumors are that it will be India's Lava). We think any victories in the smartphone market will be huge tailwind for the company (Lenovo and Orange may also use Intel's smart-phone tech in coming months). Intel estimates that the eventual size of the smartphone market could be around 1 billion phones, and even a small piece of it will be a needle-mover for the company. Further, we think this market is especially lucrative because the refresh cycle is much shorter than the PC--at least it has been thus far. Management also expects strong growth in data centers over the next three years, and we believe Intel will have no problem meeting those needs.

In addition to strong hardware results, the company's great growth in security software cannot be ignored. The release of a McAfee product integrated with Intel's hardware expertise is selling well, and the segment revenues more than doubled compared to the first quarter a year ago. This segment also swung from an operating loss to an operating profit in the quarter, suggesting the acquisition of McAfee is paying off. We think McAfee could continue to steal share from Norton and other security providers.

Overall, though margins are expected to dip in the second quarter, we think Intel is well positioned to capitalize on growth catalysts through the rest of the year. We continue to hold Intel in the portfolios of our Best Ideas Newsletter and Dividend Growth Newsletter. We think the shares are worth in the mid-$30s.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: INTC is included in our Best Ideas and Dividend Growth portfolios.