When I invest a nontrivial part of my capital in a company, one of the things that is of utmost importance is the quality of the management. Can I trust this management team to deliver strong returns in the long run? Of all of the companies that I've studied, Intel Corporation's (INTC) management team is one of the best, if not the best, that I've seen. Here's why:
1. Returning Cash To Shareholders
Intel aggressively spends to reduce the share count and to raise dividends. In the most recent quarter, the company spent $1.1B to buy back shares and spent $1.1B to pay dividends to shareholders. The current dividend of $0.90/share on an annualized basis represents a payout ratio of 36%. This leaves ample room for additional R&D, capital expenditures, and M&A, which implies a healthy mix of stability in the core businesses (CPUs and software for the PC and data center ecosystem), while at the same time allowing for ample capital to fund future growth.
2. Shrewd Acquisitions, Partnerships And Investments
Intel has been on a M&A spree during 2012. The company recently purchased a 15% non-voting stake in ASML (ASML), a company that specializes in lithography equipment, in order to speed up the development of 450mm wafers (larger wafers mean more chips per wafer, lowering costs over time and increasing margins) as well as EUV lithography (a technology that is needed in order for the company to scale to 10nm nodes and beyond). This move, I believe, will help Intel maintain a manufacturing advantage over fabless rivals such as Nvidia (NVDA), Advanced Micro Devices (AMD), Qualcomm (QCOM), and others.
An example of a strong partnership is the Intel-Micron Flash Technologies joint venture with Micron Technology (MU). NAND flash will be the cornerstone of storage technology going forward, as traditional disk drives prove to be too slow to keep up with the increase in compute power that we've seen in recent years.
A further demonstration of the shrewdness of Intel's management is that they sold their stakes in the two less advanced fabs of the venture back to Micron in exchange for NAND, while retaining a 49% stake in the most advanced fab. This allows Intel to limit its exposure to the quickly falling NAND flash prices, while at the same time securing enough supply for its own drives for both consumer and enterprise markets.
In addition to the other acquisitions this year, including interconnect IP from Cray (CRAY), a number of wireless patents from InterDigital (IDCC), and the InfiniBand business of QLogic (QLGC), a quick perusal of the Intel Capital (Intel's investment arm) shows that they have made a number of excellent investments in companies that ended up doing extremely well, including Mellanox (MLNX), RedHat (RHT), and Broadcom (BRCM).
3. Strong Corporate Direction
Intel's core business, microprocessors, is a shining example of a success story. The company commands gross margins in excess of 63%, holds a strong technological lead over its primary competitors, releases products in a timely, consistent manner, and manages to shift quickly to meet the demands of the market.
Intel was quick to identify the growing demand for laptops, and in 2003 released its "Centrino" platform, which helped push laptops into the mainstream. While some say that Intel "missed the boat" on the mobile revolution, it is clear that the company does not give up without a fight. Intel went through several iterations of mobile SoC development before coming up with Medfield. While the Medfield chip isn't particularly earth-shattering, it showed that Intel could take its 5-year old, unsophisticated CPU core and build a viable phone SoC around it that, in many cases, outperformed dual-core, modern ARM (ARMH) based chips.
Further, the company managed to spend a good deal of time working with Google (GOOG) to develop and optimize Android for the x86 instruction set, highlighting the strength and the synergy between the hardware and software teams at Intel.
So, What Could Go Wrong?
While Intel's management is strong, there are a number of headwinds that the company could face going forward. First, consumer spending is down given the macroeconomic difficulty that the global economy is facing. Competitor Advanced Micro Devices reported a less-than-stellar quarter due to the dependency of larger portion of its sales in the consumer segment. Intel is not immune, however, and continued macroeconomic problems could pose significant downside risk.
In addition, investors looking for near-term growth will be disappointed: at the most recent earnings call, the company slashed its 2012 revenue growth forecast to merely 3-5% from its previously guided "high single digits." I applaud management for being forthright with investors, but this does pose a near-to-medium term risk, especially if the company misses these targets.
Finally, Intel's success in the mobile phone sector is still yet to be seen. Despite a strong manufacturing advantage over all of the fabless semiconductor companies (and even over the dedicated foundries), the company's offerings still need to fight the well-established ARM ecosystem. Intel's success is not guaranteed here, which provides a long-term risk.