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Individual Investor...... looking for and investing in companies that i can hold....well...forever.... Avid follower of value investing gurus and their investment ideas....
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  • Intel: An “Unusual” Value Stock 0 comments
    Sep 10, 2011 9:57 AM | about stocks: INTC
            Technology Stocks and “value picks” usually don’t go together.  Heads were scratched and eyebrows were raised (including mine) when, years ago Bill Miller, the legendary value fund manager picked Dell & Amazon in his portfolio as value stocks. It seems strange that stocks in a sector where innovation occurs faster than “ speed of light” and where products life cycle are “ here today, gone tomorrow” would find any place in a classic “Buy & Hold” value investors portfolio. I was very skeptical about this sector myself from a long term perspective. Then, I found “Intel”

     

    Company Introduction:

                    Intel (NASDAQ:INTC) is the world’s largest manufacturer of semiconductor chip, based on revenues. It also designs and manufactures other computing and communications components (chipsets, and motherboards). However the bulk of Intel’s revenue, which was 43 billion in 2010, comes from the sale of microprocessors. It has nearly 80% market share in this field and it is nearly 7 times bigger than its arch rival (NYSE:AMD).  Intel’s flagship products include “Core” range of processors for the PC, “Xeon” & “Itanium” range of processors for the Servers and “Atom” range of processors for netbooks, tablets and Smartphone.

    Business Metrics:

    As we can see from the tables below , Intel has been consistently able to increase its sales (5% CAGR)  , Net profit( 25% CAGR) , Cash flow from operations ( 7% CAGR) , Earning Per share (26% CAGR)   & book value per share (5% CAGR)  over the last decade , with only exceptions being in the year 2006 , and 2008/09 when the worldwide economy was battling recessionary environment.

                                                                   

    (Billions)

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    Sales

    26K

    26K

    30K

    34K

    38K

    35K

    38K

    37K

    35K

    43K

    NPAT

    1.2K

    3.1K

    5.6K

    7.5K

    8.6K

    5K

    6.9K

    5.2K

    4.3K

    11.4K

    CFFO

    8.6K

    9.1K

    11.5K

    13.1K

    14.8K

    10.6K

    12.6K

    10.9K

    11.1K

    16.6K

    (Intel’s 10 Year Sales, NPAT, CFFO, Data Taken from Morningstar& Rounded to nearest value)

     

     

                                   

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    EPS

    0.19

    0.46

    0.85

    1.16

    1.40

    0.86

    1.18

    0.92

    0.77

    2.01

    BV/S

    5.21

    5.25

    5.72

    5.94

    5.86

    6.25

    7.20

    6.80

    7.39

    8.68

                                                                   

        (Intel’s 10 Year EPS, BV/S, Data Taken from Morningstar)

     

    The key metric to note, and this is what interested me in Intel, was a consistent rise in its dividend from the year 2004 onwards (see table below). Intel has always been paying dividends from 1993 and raised it dividends till 2001, albeit tiny percentage points, then stopped the increase from 2001-2003, and then embarked the raise again from 2004. The fact that Intel did not cut its dividend in the recession periods of 2008/09, and actually increased its dividend convinced me that Intel and its dividends are here to stay and it can be a potential dividend growth stock. This is further strengthened  by the management note in its recent annual report stating future dividend growth will roughly be in line with EPS growth rates and up to 40% of FCF will be distributed in future as dividends to shareholders.   It has a castle like balance sheet, with wonderful returns ratios (ROIC 15%, ROE 15% & ROA 12%) and virtually no debt (4%) with industry leading Profit Margins.

                                                                                   

     

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    Dividends

    0.08

    0.08

    0.08

    0.16

    0.32

    0.40

    0.45

    0.54

    0.56

    0.63

    (Intel’s 10 Year Dividend Growth 2001-2010, Data Taken from Morningstar)

     

    Using my 3-way  valuation system (http://valueubids.blogspot.com/2011/09/stock-valuation-how-to-value-stock.html)  , I derived an enterprise  value / intrinsic value of Intel of more than $ 30 dollars a share , which makes it an  excellent buy at $ 21.50 with sufficient margin of safety. This buy price represents a dividend yield of more than 4% and with a Dividend growth rate of more than 20% , Intel is a strong buy as a value and a dividend growth stock , even with a recent run up in price.

     

    Tailwind Thesis (Why Invest in Intel)

    1.       Excellent company at great price ( with margin of safety)

    2.       Great Dividend growth story

    3.       Although PC sales have saturated in the developed markets, sales are on the rise in developing markets (17% CAGR in last decade) and Intel derives 85% of its sales from Outside US.

    4.       Computers are becoming more personal again in developed markets “ One Computer per Person”  & “ More devices per user” due to rise in social networking , online gaming , online videos ,which will keep sales robust in the developed markets.

    5.       Rise of “Cloud Computing” where Intel’s server segment is active and which is Intel’s most lucrative sector in terms of operating margins.

    6.       Explosion of Netbooks, tablets, and smartphones, where Intel, although not a market leader, is a significant player.

    7.       Our entry into “electronics age”, where everything and anything is digitized, and this process require “Artificial brains/Processors”. Intel is a market leader and innovation trendsetter in making “artificial brains” across various electronic devices.

    8.       New products developments, like the “sandy bridge” chips, which are faster and less power hungry, and a massive spend on R&D, to ensure Intel remains market leader for foreseeable future.

    9.       To provide a technology “diversification” in your value “buy & hold” portfolio.

     

    Headwind Thesis (Why Intel might be risky investment)

    1.       After all it is a tech stock, where products become obsolete within a blink of an eye. However, with Intel’s massive R&D (15% of sales), we can expect Intel to hang on for a longer period compared to other tech stocks.  It, much like IBM, plans to “morph” itself into a total computing company in the future, which anticipates trends and executes them faster compared to others.

     

    2.       Cyclicality of the stock. However, with a dividend yield on cost of more than 4% and Growth rate of more than 20%, price volatility should not bother long term investors.

    3.       With the world’s obsession for tablets and smartphones, Intel’s main threat in the future comes from its inability to snatch market share away from the leader in this sector (ARM holdings). However , seeing Intel fend off AMD in the past with such ease , we cannot rule out Intel being market leader with its “ATOM” line of processors for tablets and smartphones in the future

     

    Disclosure: I have “Intel Inside” my portfolio.

     

     

     

     

     

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