Noticeably absent from Berkshire Hathaway's (BRK.A) recent 13F were 7.7 million shares of Intel (INTC) that Buffett dumped prior to the most recent filing. This unlikely union had a short lifespan. But, before you decide to follow in Buffett's footsteps, let's take a close look at Intel.
Intel has a market cap of about $132 billion and trades at 11.16 times trailing twelve month earnings. This price to earnings ratio is well within Buffett's comfort zone, as is the 0.93 price to earnings growth ratio. The price to book ratio stands at 2.72 and also meets the Buffett standard. Intel boasts a 25.42% return on equity, which we know Buffett appreciates. Quarterly year-over-year revenue growth stood in positive territory at 3.6%. But quarterly year-over-year earnings fell into negative territory, coming in at -4.3%.
Intel's financial strength hasn't deteriorated. Intel's debt to equity and current ratios of 14.83 and 2.45 are impressive. Throw in a dividend yield of 3.2% that represents a modest 36% of earnings, and what's not to like?
Intel has a beta of 1, is outperforming the S&P 500 (SPY) and is trading pennies below its 200-day moving average. On a discounted cash flow basis, the stock is trading at fair value. Intel's earnings report eased investor concern regarding excess computer chip inventory. Intel CEO Paul Otellini said, "Demand is strong enough to ward off a glut." Intel is a great company. In my view, Buffett's exit from a position in the stock simply means he found something he liked better. It would be wrong to see it as a condemnation of Intel.
Intel currently has several positive catalysts in play. Intel launched its Atom line of processors in late 2011 that are now appearing in computers offered by Acer, Asus, HP, Lenovo, Samsung, and Toshiba. This next generation CPU consumes less power and takes up less space than its predecessors. These features are especially critical in mobile devices.
Intel will buy 10% of ASML Holdings (ASML) for roughly $2.1 billion and plans to acquire an additional 5% stake down the road. That would amount to a total of $3.1 billion invested in ASML. Concurrently, Intel is committing to provide non-refundable R&D support through 2017, totaling almost $1 billion, to accelerate development of extreme ultraviolet (EUV) and 450mm wafer technology. This technology holds great promise for reducing production costs. The synergy between Intel and ASML Holdings will be mutually beneficial, but some have been critical of the "no strings" nature of the agreement. In my view, this concern is unwarranted. Intel will be the principal beneficiary of the technology by virtue of its status as the largest provider of processors. Any monetary gains ASML Holdings enjoys from the successful development of this new technology will be shared with Intel through its 15% stake in the company. Like other analysts, I believe this is a big win for Intel.
Other significant industry players like Texas Instruments (TXN) have serious issues as investment alternatives. Texas Instruments, with a market cap of about $34 billion, trades at a multiple of 21.90. This is quite pricey. The same can be said of its 3.01 price to book ratio, which exceeds my personal threshold for a value stock. The price to earnings growth ratio is also unimpressive at 2.19. Quarterly year-over-year revenue and earnings growth are both negative. I can't find fault with its financial soundness, its dividend or its management, but the company just isn't on par with Intel from a value investor's perspective. It has recently suffered a setback on what may have been a lucrative deal with Toshiba.
I believe Buffett's exit from Intel was not a slight to Intel, but rather an acknowledgement that demand for processors is slowing. Buffett apparently believes that more opportunity for growth exists with Wells Fargo (WFC) and The Bank of New York Mellon (BK). These are not new positions for Berkshire Hathaway, rather, this represents additions to existing holdings. Buffet rounded out the portfolio by adding to his oil holdings. I have the deepest respect for Buffett's investment acumen, but my view is that this exit was premature. Perhaps this exit is more a reflection of Buffett's innate distrust of the technology sector than a pronouncement on Intel itself.