Intel Earnings Preview: A Truly Busted Growth Stock Or Something Else?

| About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) reports their calendar q4 13 financial results after the bell on Thursday, January 16th, 2013, with analyst consensus expecting $0.52 in earnings per share (EPS) on revenues of $13.72 billion for expected year-over-year growth of 8% in EPS and 2% in revenues.

Since the October '13 earnings release, there has been some downward pressure on q4 13 consensus EPS and revenue estimates, from $0.54 to $0.52 and from over $14 billion to the current $13.72 billion.

If the consensus estimates are met, INTC will have seen full year revenue decline 1.5% and EPS decline 10%, the second consecutive year of declining EPS growth. In fact 4 of the last 6 years have seen declining EPS growth, with 4 of the last 6 years seeing negative revenue growth, for the microprocessor giant.

There are many writers and investors on the site that understand the technology of Intel far better than I do, including Ashraf Eassa in this article here and Michael Blair in this article here. These guys are both far smarter than me when it comes to the aspects of technology that require an electrical engineering degree, which I stick to the tried and true methods of financial analysis and get my arms around INTC's valuation.

That is the issue with Intel: a seemingly cheap stock with little growth but an attractive valuation, that is looking more and more like a value trap, unless they can get this whole mobile chip or microprocessor market cracked.

We have been long Intel for years, and according to our internal spreadsheet, the 13 year average growth rate of EPS and revenues, since the 2000 top was 5% revenue growth and 15% EPS growth, which also includes the year 2000 where Intel grew EPS y/y 41% and revenues 15%. In fact 2001, was the worst year of revenue growth for Intel as revenues fell 21% (even worse than '08 and '09 when revenues fell 7% and 2% respectively).

Those average growth rates aren't that bad, but if you looked at the stock performance over that 13 year time frame, the stock has been locked in a range. Once we hit 2001, Intel became a broken growth stock. Since its low in '02 at $13 per share, INTC has traded up to the mid $30's once and has been locked in this trading range ever since. It is getting to "do or die" time.

In 2014, current consensus is expecting a flat year of $1.89 (vs 2013's expected $1.09) on essentially flat to 1% revenue growth of $53.2 bl.

Technically, INTC broke above its 2013 high Tuesday on the JP Morgan upgrade, so that is a positive technical development.

From a valuation perspective, INTC remains attractive with a 6(x) price to cash-flow and an 11(x) price to free-cash-flow valuation and a 3.5% dividend yield. This article we wrote in early December '13 talks about all the money INTC has poured into capex, which generated very little revenue growth in 12 years.

The economics of Intel's business requires volume and growth. It is the Achilles Heel of capital intensive businesses.

We remain long our Intel stock and have used weakness in the low $20's to lower-our cost basis through the years. However our patience is wearing thin. Even though 2013 was the worst year for PC growth since 2001, down 7%, the secular growth of PC's may only return to low single digits and remain there.

Morningstar has an intrinsic value on Intel of $25 per share, while our internal model values INTC closer to the low $30's.

Hopefully INTC CEO Brian Krzanich can pull INTC out of this prolonged slump and move the company into new markets.

Something has to give...

Disclosure: I am long INTC, JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Semiconductor - Broad Line, , Earnings
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