This report analyzes Intel Corporation's (Intel) (NASDAQ:INTC) senior unsecured 3.70% 2025 bond with original issuing amount of $2.25 billion, which is still outstanding as of this writing. Issued on June 22nd, 2015, with a dated date of June 29th, 2015, Intel's bond is callable starting on April 25th, 2025. Considering Intel's financial performance, the bond's yield, and the comparable analysis against some of its peers, I would recommend a buy rating for Intel's 3.70% 2025 bond to risk averse investors.
The A+ rating from Standard & Poor's and A1 rating from Moody’s ratings communicate to potential investors that Intel has a strong capacity to pay its interest and principal. In my analysis, I utilized the June 30th, 2017, trade price of $105.27 and $10,000.00 as the face value. With that, I obtained a base price of $10,527.00 and accrued interest of $160.33, resulting in an invoice price of $10,687.33 (See Appendix A). Additionally, I obtained a yield-to-maturity of 2.961% for the bond. Further computation shows a yield-to-first-call of 2.941%, which is the yield-to-worst because the bond call date is just three months away from maturity. The bondholder is better off if Intel chooses not to call the note.
Given the current market condition and Federal Reserve's signal to raise rates, Intel may decide not to issue a call on April 29th, 2025, even if the company has the fund to do so. Perhaps, if the market interest rate falls to the level that makes financial sense for Intel to call the bond at the predetermined price and simultaneously issue a new bond at a relatively lower interest rate, the company might be compelled to call the note to save on interest expense.
For comparisons purposes, I analyze Intel's bond against similar corporate bonds issued by NVIDIA Corporation (NVIDIA) (NASDAQ:NVDA) and Micron Technology, Inc. (Micron) (NASDAQ:MU) The analysis shows Intel's 3.70% 2025 bond is a strong candidate for investment to risk averse investors, NVIDIA's 3.20% 2026 is a good investment candidate to risk neutral investors, and Micron's 5.50% 2025 bond is recommended to investors with much higher risk appetite.
Intel is an American multinational technology company based in Silicon Valley, California. Two legendary tech pioneers, Gordon Moore and Robert Noyce, founded Intel in 1968. Intel’s first product was memory chips; as technology evolved, it divested to a microprocessor. Today, Intel's microprocessor appears in personal computers manufactured by notable tech giants such as Apple (NASDAQ:AAPL), Lenovo (OTCPK:LNVGY), HP (NYSE:HPQ), and Dell. In addition to microprocessors, Intel makes motherboard chipsets, network interface controllers and integrated circuits, flash memory, graphics chips, embedded processors, etc.
Located in more than 63 countries/regions around the world, Intel has a little over 106,000 employees on its payroll. With 2016 annual revenue of $59.3 billion and a market capitalization above $150 billion, it remains a dominant force in the tech industry. Data obtained from Yahoo Finance shows Intel’s 2016 balance sheet to have $113.3 billion in the total asset, $46.2 billion in total liability, and $66.2 billion in total stockholder equity.
According to business intelligence platform CSI, Intel has three notable units that compete aggressively for market share. Among them is Data Center Group with 2017 Q1 market share of 29.54%, PC Client Group with 2017 Q1 market share of 73.76% and Software Services Group with a negligible 2017 Q1 market share of 1.76%. Intel delivered Y/Y revenue growth of 7.98% for 2017 Q1 - the result is lower than its industry competition's average revenue growth of 10.03% for the same quarter. Intel in the same quarter delivered a net income growth of 44.87%, which is significantly higher than its industry competition average net income growth of 6.64%.
Intel has been aggressive in the acquisition space. Between 1997 and March 2017, the company engaged in 86 acquisitions according to the data provided by CrunchBase, a company that tracks tech companies' purchases. Intel funded its 2015 purchase of Altera with $7 billion bonds issued in the same year; a unit of these bonds is the subject of this report. Most recently, Intel acquired Israel-based driver assistant technology company called Mobileye (NYSE:MBLY) for $15.3 billion in clear demonstration of its determination to be at the frontier of the next big thing. Though the terms of Mobileye's acquisition remain undisclosed, given Intel's established precedent, I anticipate the company might issue a series of bonds to generate the cash needed to complete the cash portion of the transaction
To close its 2015 $16.7 billion acquisition of Altera, Intel issued a series of $7 billion long-term bonds. Each unit possesses unique characteristics. Among them is 2.450% 2020 note, 3.100% 2022 note, 3.700% 2025 note, and 4.950% 2045 note. This report focused on 3.700% 2025 note with $2.25 billion original offering amount.
Intel issued the 3.700% corporate debenture bond on July 22nd, 2015, with a maturity date of July 29th, 2025. The bond has a dated date of July 29th, 2015. Therefore, interest on the bond started accumulating as of July 29th, 2015. The bond is callable at par value beginning on April 29th, 2025. Though Intel's 3.700% 2025 bond is callable; however, the bond does not have a put right attached. Investors who purchased the bond do not have the right to force Intel to repay the principal earlier than the stated maturity date. The bond’s coupon payment is semiannual; Intel makes payments on January 29th and July 29th every year at the annual coupon rate of 3.700%. Given that the bond is a senior unsecured debt, no Intel asset stipulated as collateral for the debt, but in the event of bankruptcy, holders of 3.700% 2025 bond would be paid first relative to the holders of a similar but junior bond.
S&P issued A+ rating on the note whereas Moody's released A1 rating. Both ratings convey investment grade status and indicate Intel's high ability to pay both interest and principal (See Appendix D). Additionally, the note does not possess any protective covenant. Protective covenant limits what the bond issuer can do while the bond is still outstanding. For example, a limit on the amount of debt the issuer can issue in the future - this is done to protect investors' interest.
Yield and Duration
After careful analysis and computations, I determined that Intel's bond possess the following statistics (See Appendix A):
Nominal Yield: 3.700%
Nominal yield, which is also known as the coupon yield, determines how much coupon payment would be delivered periodically to the bondholder. Simply, this is how much money the prospective bondholder will get each period. Investors holding $10,000.00 face value Intel bond would receive $370.00 each year as coupon payment, $185.00 semi-annually.
Current Yield/Income Yield: 3.515%
The current yield is close to the actual return on the bond than the nominal yield. The market price of the bond changes with a fluctuation in market interest rate, and the current yield is calculated by dividing the coupon payment by the actual price of the bond. At June 30th, 2017, trade price of $105.27, Intel's note has an income yield of 3.515% - the one-year return on the bond. All else held constant, a higher coupon payment would mean a higher income yield and a lower capital gain.
Yield to Maturity (YTM): 2.961%
At the June 30th, 2017, trade price of $105.27, Intel's bond shows a YTM of 2.961%. The YTM is the actual return on the bond if the bond is held to maturity since it takes into account the present value of the future coupon payments and the present value of the principal. One critical assumption behind YTM is that all the coupon payments before maturity get reinvested at a rate equal YTM. The inability of investors to reinvest the coupon payment at a rate equal to YTM while assuming they would get 2.961% at bond maturity creates a yield illusion.
Yield to Call (YTC)
The return on the bond for the period between the settlement date and the call date, if the bond is called, is known as yield-to-call. If Intel chooses to exercise its right to call the bond on April 29th, 2025, as stipulated on the bond prospectus, then the bond holders would earn 2.940% return (See Appendix B). The YTC is lower than 2.961% YTM, which makes YTC a Yield-to-Worst since the bondholder would receive a higher return if the bond is held to maturity.
The duration of a bond indicates how long it would take to recover the real cost of the bond. Intel's 3.700% 2025 bond would take roughly 7.110 years for the bondholder to get back the associated true cost. Whereas, modified duration is a measure of price sensitivity to 1% change in yield (See Appendix A). Modified duration alone is not a good measure of price sensitivity when the yield changes significantly in either direction. For this reason, we utilize a tool known as convexity correction in addition to modified duration to provide a better measure of bond price sensitivity to changes in yield.
To evaluate the sensitivity of the bond prices to interest rate changes, I utilize the modified duration concept highlighted in the previous paragraph. Intel's bond has a modified duration of 7.0059 years and convexity correction of 0.308%; further computation indicates that Intel's bond price would rise by 7.314% if the market interest rate falls by 100 basis points and would decline by 6.698% if the market interest increases by 100 basis points (See Appendix C).
I would recommend a buy on Intel's 3.70% 2025 bond to investors with low-risk appetite. Three variables informed my recommendation: Intel's financial performance, the bond characteristics, and analysis against its peers: NVIDIA Corporation (NVIDIA) and Micron Technology (Micron).
I performed the analysis specifically against NVIDIA Corp.'s 3.20% 2026 bond with 3.234% yield and June 30th, 2017, trade price of $99.73. Also, against Micron Tech's 5.50% 2025 bond with 4.668% yield and June 30th, 2017, trade price of $105.25. All three bonds are callable at the trade price mentioned in the introduction; Intel has 2.941% yield-to-call, which is higher than Micron's 2.871%. NVIDIA would only call its bond under certain circumstance, therefore, no specific call date indicated. Intel's bond has a much better rating than NVIDIA's bond and Micron's bond. A1 from Moody's and A+ from S&P, whereas, NVIDIA has Baaa1 from Moody's and BBB- from S&P. Micron has Ba3 from Moody's and BB from S&P.
Intel delivered competitive financial performance over the years and in some cases outperformed its peers. For a three-year average between 2014 and 2016, Intel delivered 11.313% return on asset, 18.75% return on equity, and 14.643% return on invested capital. Whereas, for the same period, NVIDIA had 12.173% return on asset, 20.2% return on equity and 14.557% return on invested capital. Micron for the same period had 8.663% return on asset, 17.817% return on equity, and a 12.817% on invested capital.
When it comes to bond analysis, investors pay attention to the financial health of the company; every rational investor wants to know if they choose to invest in any given bond, will the company continue to do well enough to maintain the coupon payment and potentially return the principal as dictated on the bond prospectus. The variables highlighted below addressed the subject. For a three-year period between 2014 and 2016, Intel had 2.02 current ratio, 1.38 quick ratio, 0.287 debt/equity ratio, and 30.91 interest coverage ratio. The current and quick ratio measure how well a company is positioned to meet its short-term financial liabilities. Debt to equity ratio measures how much debt a company has on its balance sheet relative to equity. To measure a firm's ability to cover its debt obligation, we utilize the interest coverage ratio; formulae: EBIT/Interest Expense.
The graph below is a representation of coverage ratios of these companies. The chart shows Intel is in a better position to meet its debt obligation compared to its peers like NVIDIA Corporation and Micron Technology, Inc.
The higher the ratio, the better the firm is well placed to pay its debt. For the same three year period, NVIDIA had 4.57 current ratio, 4.10 quick ratio, 0.335 debt/equity ratio and 22.67 interest coverage ratio. Micron for the same period has 2.10 current ratio, 1.48 quick ratio, 0.58 debt/equity ratio and 5.71 coverage ratio (See Appendix D).
Based on the available information and the analysis performed, Intel's 3.70% 2025 bond is a strong candidate for investment to risk averse investors, NVIDIA's 3.20% 2026 is a strong investment candidate to risk neutral investors and Micron's 5.50% 2025 bond is recommended to investors with much higher risk appetite.
Appendix A - Yield to Maturity
Appendix B - Yield to First Call
Appendix C - Price Yield Curve
Appendix D – Comparable Bonds
Disclosure: I am/we are long MU.
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: As my profile would indicate, I'm a senior at College of Business, University of Illinois at Urbana-Champaign, pursuing a dual degree in Finance and Accountancy. The report originated from my personal research; however, I manage a personal portfolio that currently holds a position in Micron Technology, Inc. For more insight on the bond/stock market, please follow me and leave a comment below.