Intel Vs. Advanced Micro Devices: Not The Story Of David And Goliath

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Includes: AMD, INTC
by: Mark Bern, CFA

Summary

AMD and Intel by the numbers.

Side-by-side comparison. A choice of investment versus speculation.

Other articles that may be valuable.

I realize that this is not really a fair comparison but the two are competitors of sorts in the primary business of each company. Advanced Micro Devices (NASDAQ:AMD) has one thing going for it: customers want it to survive to prevent Intel (NASDAQ:INTC) from having a virtual monopoly.

This has been the story since early in the days of personal computers. It has changed somewhat as other competitors emerged. But AMD remains its biggest competitor in two of the six Intel operating segments: personal computer processors and the DEG chipset and motherboard segments. And there are few, if any, alternatives of scale. So, many customers buy from both and keep AMD alive (often just barely).

AMD is struggling again, looking to sell a large stake of the company in a private placement or for a buyer to acquire the entire company. Or, at least, that is what the rumor mill tells us. We will take a look at the numbers to see why. The charts in the next two sections were created by Mark Bern, CFA and the data source was oldschoolvalue.com.

AMD by the numbers

We will tell most of the story through charts with a few words to explain the significance (if any) of that at which we are looking. The first chart shows us that the trend in annual revenue is horrible. Notice the trend line and its downward slope. Over the ten-year period shown, AMD revenue has fallen at a compound annual rate of 3.5 percent. That is not a healthy sign.

As terrible as the revenue chart is, the earnings chart may be even worse. I did not bother to put a trend line in this one because it would misrepresent reality by telling us that results are getting less bad over time. But, outside of 2007 and 2008 (when losses required extending the chart area lower to accommodate), the company has averaged a loss of $190 million per year. Remember, that is only after eliminating the really bad years. The annual compound rate of growth in earnings of 19.2 percent is also misleading since the company is still losing money regularly.

Since there are no dividends being paid by AMD, I will skip on down to look at the annual FCF (free cash flow in relation to net stock issuance (includes issuance and buybacks). With most companies, I use the title FCF versus Stock Buybacks, but in this case, there is not a preponderance of shares being bought back so the net issuance makes more sense to me. The thing to make note of in this chart is that the blue bars, representing FCF, are almost all negative. The company issues stock to aid in funding operations. Neither of these observations should create confidence for investors.

The next chart show us the annual net change in debt for AMD. It appears that management is attempting to reduce its debt burden, using proceeds from a stock issuance. That makes sense if rumors are true and management is trying to dress up the company for a possible sale.

Not much is needed to explain the annual shares outstanding chart; a gradual rise, diluting shareholders ever so gently until recently. The share price has risen on the rumors giving management the opportunity to sell shares at higher prices. If the company can sell itself the dilution will not have hurt shareholders, but if the plan fails, I suspect the share price to fall back to earth. The dilution probably does not matter in either case.

I included the cost of acquisitions chart only for comparative purposes since I am also including one for Intel. AMD has not made a lot of acquisitions over the years (what would it buy with?) and those that it has made have not improved the operating results.

Intel by the numbers

Intel has a far different story to tell. First, it has one or more competitors to each of the six operating segments; AMD is just one of several companies with which INTC must contend. As you can see by looking at the annual revenue chart every year does not come up roses for Intel. There are down years as well as up years. But overall, the long-term trend is sloping up. The compound annual rate of revenue growth over this ten-year period is five percent. This is a good sign but only part of the picture.

The annual earnings chart paints a similar picture with down years dispersed within a rising trend. The company is currently in transition and will focus more on areas of growth that arise from its recent huge acquisitions of Altera ($16.75 billion) and Mobileye.($15.3 billion). I will discuss what is expected from each a little later. The overall compound annual growth rate for earnings is 4.4 percent. This is below the revenue growth, which is a little disconcerting, but still positive and decent considering the company has experienced declines in last two years.

Dividends paid by Intel are a brighter spot for investors. If the acquisitions work out over the longer term, the rate of dividend growth should continue close to its long-term pace. Over the past ten years, the compound annual rate of dividend growth has been 9.8 percent. That should keep investors well ahead of inflation during retirement.

I felt it important to include the net issuance of stock chart to show that Intel does issue a good many shares each year (mostly executive compensation) to partially offset its significant stock buyback program. But only in 2007 did the cost of issued shares outpace buybacks. The net issuance number will be used as a proxy for buybacks in the next chart.

To create this next chart I added the total cash outlays for dividends each year to the annual cost of buyback net of share issuance. The comparison to FCF is important because it tells us part of the story about what the company is doing with the FCF generated. In this case, FCF generally outpaces the cost of dividends and buybacks. This is a good outcome.

The next chart adds to the tale about management allocation of capital. The annual change in debt tells us that the company needs more cash than is left over from the FCF that is generated. Much of that need arises from the cost of acquisitions the company has made. But share repurchases also constitute a good share of the use for borrowed funds, especially in 2011 after the acquisition of McAfee for $7.68 billion and Infineon for $1.4 billion (both in 2010). Of course, with interest rates on debt being so low, Intel management may have also made the decision to exchange some of its equity for debt to reduce its weighted average cost of capital.

It is good to see a relatively consistent downward slope in shares outstanding over the years. This is not a company that only buys shares at record highs to support the price. Intel made large share repurchases (not just in the number of shares, but in total cost) while the share price was historically low in 2008, 2011 and 2014. It has continued to buy back shares but has also reduced the amount of cash allocated for that purpose to much lower levels since the stock price has risen. But at least it is keeping ahead of stock issued to keep the slope trending down.

Finally, the cost of acquisitions chart for Intel looks a lot different than the one for AMD. The numbers are considerably larger, especially in the last two years. The Altera and Mobileye acquisitions were made to position Intel in areas of expected future growth: cloud computing, IoT (Internet of Things) and autonomous vehicles. Each of these areas have significant implied growth prospects. Cloud computing is well underway but could have much further to go over the next decade or more.

The IoT is really an extension of the data centers and related cloud computing but is expected to connect everything, and, if it becomes reality, has a very long way to go. Autonomous vehicles is a very new field that has just scraped the surface of its potential and should have a lot of growth over a relatively long period of time (several decades). There are still questions as to the total potential revenue and margins that will be produced from each of these technologies. But we feel assured that if there is a reasonable profit to be made on a massive scale in high-end chip technology, Intel will find a way to play.

A side-by-side comparison

AMD

INTC

Compound annual Revenue growth rate

-3.5 percent

5.0 percent

Compound annual Earnings growth rate

19.2 percent

4.4 percent

Compound annual Dividend growth rate

N/A

9.8 percent

Debt to Equity Ratio

304 percent

39 percent

Current P/E (trailing twelve months)

-21.2

15.3

Price to Sales

2.44

2.75

Price to Book

26.43

2.49

Price to Free Cash Flow

-24.02

14.58

Compound annual FCF growth rate

N/A

5.3 percent

R&D as a percent of Revenue

23.3 percent

21.2 percent

Cash as a percent of Revenue

21.3 percent

28.6 percent

Several rows of this table favor Intel, as expected, especially the growth rates for revenue and FCF. The one that should pop out is the debt to equity ratio, which is incredibly high for AMD even after the company has retired more than a quarter of debt outstanding in the last year. Of course, negative FCF and a negative P/E (meaning negative earnings) are also show-stoppers for AMD.

Intel, on the other hand, appears to be in good shape. No surprises here.

What does the Friedrich algorithm tell us?

Well, for starters, it is telling us that AMD has negative FCF and is extremely overpriced based upon fundamental analysis. The high price is merely a product of rumors for an acquisition by some major company that might want to compete with Intel. Strategically that does not make a lot of sense to me, but, then again, I have not given the matter a lot of thought. This is a trader's stock, not an investment in my humble opinion. And right now, I would not be a buyer looking for that greater fool.

Source: AskFriedrich.com

Intel is once again a different story. However, Friedrich does not rate the company a buy for several reasons. First and foremost, the CapFlow ratio (the percent of cash flow used in capital expenditures) is too high for Friedrich's taste. The algorithm does not like capital intensive companies because too much cash is necessary to maintain operations and create growth.

While FROIC (free cash flow return on invested capital) is relatively consistent, it is lower (at ten percent) than Friedrich requires in identifying companies with strong future growth potential. The algorithm prefers a rate of return consistently above 20 percent. My personal preference is for a FROIC that is consistently above 15 as long as everything else is in order. In this case, I would prefer to see greater consistency in revenue growth.

Friedrich also likes a Friedrich Cash Machine (amount of FCF generated by each dollar of revenue) ratio above 15 percent. I can accept anything above ten percent as long as it is consistently above that level year after year. In the case of Intel, I would make an exception as it is so very close to that 15 level even in its worst years.

The only other concern that Friedrich and I have with Intel is that the stock is not selling at a bargain price. I like to buy great companies when on sale because it keeps my cost basis low enough to weather the worst of storms. One way Friedrich identifies bargains is by looking for stocks with a Price-to-Bernhard-Buffett FCF ratio below 15. This ratio divides the price by the FCF (defined as cash flow less capital spending). It is the guts of the algorithm in my estimation and is based upon a 60-year backtest of the Dow Jones Industrial Index and components.

It is a very powerful identifier of stock with strong future growth potential. The method of investing used in the back test produced an annual compound rate of return of over 20 percent. That is why we use it in our Marketplace offering, Friedrich Global Research, where we apply the algorithmic analysis to 17,000 stocks in 36 countries.

Friedrich is merely a tool for analyzing stocks, good and bad, to quickly and easily identify those with the very best long-term prospects. This does not mean Intel is a bad stock or company. It just means that the company does not meet the very high requirements of a very selective analytical approach. Intel is a great company, but maybe not such a great investment at the current price. It is not horribly overvalued. It is just not a bargain.

Source: AskFriedrich.com

In addition to our Friedrich algorithm, I rely on a tool that I found to be very useful in verifying our work. The Forensic Accounting Stock Tracker (FAST Model) helps identify companies that may be resorting to more financial tricks to make analyst estimates. The model helps pinpoint where management might be aggressive with revenue recognition, cash flows, the balance sheet, and also takes into account valuation and other metrics. Here is an example of the FAST Models' results for AMD and INTC:

No surprise. Problems in cash flow, valuation and no dividends result in an overall poor stock.

Intel has a great scorecard! There are very few companies that attain a rating of A, so a B is what I consider to be great.

Conclusion

AMD is not a David but Intel is Goliath. We rate AMD a sell and suggest investors avoid the stock at this price level. We rate INTC a hold and would consider the stock with a few minor improvements in the areas mentioned and with a price decline to $24. We have no illusions as to the probability that the price of this stock will fall below our target.

It would only happen during a bear market and require a global recession. We are not predicting such as imminent but do not rule out the possibility since the current bull market is one of the longest in history. Eventually, we will find our price on the stocks we want to own. Patience my dear Watson, investing is elementary.

If you have any questions, please feel free to ask them in the comment section below and don't forget to hit the "Follow" button next to my name at the top of this article. We are now able to analyze indices and will begin the process of analyzing ETFs, mutual funds and certain popular portfolios managed by gurus of the investment world. That effort will, of course, be in addition to providing analysis on individual stocks.

For those who would like to learn more about my investment philosophy, please consider reading "How I Created My Own Portfolio Over a Lifetime."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

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