Intel Corporation (INTC) has dropped nearly 12% this year in a move that has erased over $10 billion in shareholder value. This drop in share price has been accompanied by a fundamental decline in firm strength. Through this article, I present the bullish, contrarian view that the recent decline in price is disproportionate to the company's performance and investors looking to purchase Intel in the near future stand to gain as prices increase once again.
A History of Returns
In this analysis, I have relied heavily on return on assets and return on equity. Return on assets is the net income of the firm divided by average total assets, and this metric tells the analyst how efficiently the organization uses its assets to generate profits. Return on equity is net income divided by directly-invested shareholder equity, and this ratio informs the investor as to how well the firm uses investments to generate income.
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The chart above shows five years of return on asset and return on equity data for Intel. In order to put these ratios into proper perspective, I have also charted the market value of the firm. Beginning in 2008, Intel experienced a period of fundamental suffering, which lasted until late 2009. During these years, return on assets and return on equity declined and shareholder value decreased by nearly 50%. The reason for this decline was fundamentally rooted in the fact that Intel was become less efficient at utilizing its assets and leveraging its shareholder equity to generate profits.
Beginning since 2010 however, Intel once again increased its return on assets and return on equity and the market responded by adding nearly $30 billion to the value of the firm. This growth in returns continued until the middle of 2011. Between the third quarter of 2011 and the second quarter of 2012, return on assets and return on equity have declined and share price has responded by moving downwards sharply after a brief run-up in price.
It is my belief that the recent sell-off in share price is not rooted in the fundamental performance of Intel. I believe that the investors and traders who have decreased the share price of Intel over the past few quarters have done so out in a speculative move that has ignored the fundamental condition of the security. Intel is currently performing strongly, as can be seen from a return on assets and return on equity standpoint. While these ratios have slightly decreased during the past few quarters, the levels of performance are still very strong.
Intel demonstrated in 2009 and 2010 that it was more than able to deliver performance to the market place and it has sustained its heightened level of strength ever since. I believe that investors who are trading the security on the short side have ignored the fundamental performance of Intel and are trading based on a short-term bias.
Not only has the firm sustained its fundamental momentum that began in 2009, but it has also retained its ability to generate profits as seen by profit margin. Profit margin is the net income of the firm divided by initial revenues and it shows, at a high level, how well the firm is able to actually bring income into the firm.
As the chart clearly shows, Intel strongly rebounded in 2009 and has sustained heightened performance ever since. Many investors may note that ever since 2011, profit margin has been declining; but to base one's analysis on this fact is to ignore the fact that the firm's current margin is very strong in that it is able to keep $.20 of every dollar of revenues as profit. With such a strong history of excellent profit margins and heightened levels of returns, I believe that Intel represents a sound investment.
Despite the fact that I believe that Intel is a strong company, I do not believe that it is appropriate to immediately purchase the security. Markets have a habit of trading against the fundamentals for a period of time and investors who are caught against the current can easily get shredded up by volatility. For this reason, I advocate simple technical entry criteria prior to initiating any investment. In the below chart and annotation, I have included a technical synopsis of Intel.
Intel is undoubtedly in a downtrend. Prices have failed to make new highs and are continuously making new yearly lows. Within the past month, price has collapsed through the technically-significant level of $23.30 and further downside is entirely possible. I do not believe that investors should consider purchasing the security until price once again overcomes the significant barrier of $23.30. To play this trade safely, I believe that a buy stop of around $24 should position an investor nicely should prices recover and the market once again realizes the fundamental strength of Intel.