Intel (INTC) dropped sharply at the open today, and the only reason I can find is because of more headlines about the much-covered EU fine:
The EU probe concluded Intel impeded competition by giving computer makers rebates from 2002 until 2005 on the condition that they buy at least 95 percent of its chips for personal computers from the Santa Clara, California-based company
For what it's worth, Intel called the claim "utterly hopeless" and the evidence used to support it "defective."
While in general, companies are obviously going to try and dismiss any claims against them as ridiculous, Intel's got some serious backing on its side:
Intel gained backing from the European Ombudsman, who censured the Commission for procedural errors in its investigation.
In his non-binding report issued five months after the regulatory finding, the Ombudsman said he had found "maladministration" because the regulator had failed to make a proper note of a meeting with Dell during its probe.
Also notable: Lenovo stated that its dealings with Intel were "not exclusive" and that it chose Intel over AMD in 2007 because AMD was not a "reliable supplier or business partner."
The Lawsuit: Relevant to Intel Shareholders?
The lawsuit is relevant to Intel shareholders, but not in the way you might think. It's relevant because it's caused a dip, which represents a buy opportunity. But to the company's fundamentals, it's entirely irrelevant.
First point to analyze: the fine's potential impact on the company's balance sheet. Intel has a very strong balance sheet that's more than capable of handling the potential fine. (See the chart below for a few key stats.)
INTC Shares Outstanding data by YCharts
With Intel, you're paying more for the business than for the assets (price/book is roughly 2.8). Intel has over 4B of cash/equivalents on hand, and could pay the fine in a blink of an eye. Based on shares outstanding, the actual fine amount is only $0.26 per share - about 1% of the current share price. From a pure numerical standpoint, the fine isn't a very big deal. (And Intel has a chance to appeal it.) The fine also pales in comparison to Intel's capex spending spree, which involves construction of several multibillion dollar fabs.
The second point to analyze about the lawsuit is regarding matters that (supposedly) occurred over five years ago. The EU has never claimed that Intel is currently engaging in anticompetitive practices, and there's no reason to expect that Intel's current business plan will be impacted at all.
Intel is reasonably valued by all metrics: P/E is 11.38 (vs Semiconductors average of 16.7), PEG is 0.94 (vs Semiconductors average of 1.3), Price/Cash Flow is 7.24 (vs Semiconductors average of 11.73) and Price/Sales is 2.6 (vs Semiconductors average of 3.8). Intel's EPS growth declined in 1Q on a year-on-year basis by 5.36%, but the industry as a whole logged a staggering 36% decline in the same quarter. Intel has grown cash flow and has a strong dividend and share buyback program. There are plenty of other factors that make Intel a winning investment.
In conclusion, Intel shareholders should not worry - at all - about the current headlines. (As Warren Buffett says, investors shouldn't react to headlines.) Intel's fundamentals are strong and valuation is attractive. For any company like Intel with strong fundamentals, "bad headline" dips should be viewed as buying opportunities.
With Intel, there's really only one type of "news" investors should be focusing on: the progress in mobile processors as they compete against the more-established ARM Holdings (ARMH), Samsung, and Qualcomm (QCOM). I personally believe that existing information suggests a strong future for Intel in the mobile arena, but since mobile computing is obviously the "next big thing," investors would do well to follow key developments and come to their own conclusions about which companies are best suited to succeed in the current tech landscape.
Disclaimer: I am an individual investor, not a licensed investment advisor or broker dealer. Investors are cautioned to perform their own due diligence. All information contained within this report is presented as-is and has been derived from public sources and management. Always contact a financial professional before making any major financial decisions. All investments have an inherent degree of risk. The future is uncertain, and actual results may be materially different from those expected. Past performance is no guarantee of future results. All views expressed herein are my own, and cannot be interpreted as the views of my employer(s) or any organizations I am affiliated with. Presentation of information does not necessarily constitute a recommendation to buy or sell. Never make any investment without conducting your own research and reading multiple points of view.
Disclosure: I am long INTC.
Additional disclosure: I may add to my INTC holding over the next 72 hours.
