Intel: Buy For Solid Financials Despite A Bumpy Year Ahead

Summary

• Intel reported Q4 financial results, beating on EPS but missing on revenue. The stock plummeted 5% the next trading day on cautious guidance.
• Although the revenue miss is a negative event for INTC, the actual numbers are not as bad as they appear. Revenue increased 9.4%, while EPS grew 18% in the quarter.
• Intel's performance demonstrates strong financial efficiency standards during difficult times, which is the primary reason to own the stock at the moment.
• Although the competition continues to be stiff, Intel stock provides a solid margin of safety, with almost 3% dividend yield, 10 forward P/E, and impressive revenue and EPS growth.

Intel reported quarterly results, the stock plummets

On January 24, Intel (NASDAQ:INTC) reported its financial results for Q4, beating on EPS by $0.06 or 5%. However, the revenue numbers turned out to be slightly lower than expected, which led to numerous negative headlines in the media stating that the difficulties in the semiconductor industry have caught the company. As a result, the stock plummeted 5% the next trading day, plunging almost 8% at some moments.

Data by YCharts

While the revenue miss and cautious guidance definitely did not bring positive news, the sell-off in INTC looks like an overreaction. It has been known that the competition with rivals such as AMD (AMD) in the data center and other segments would intensify by the end of 2018, but most of the concerns were already priced in, evident by a sharp decline in the stock price from the highs of July 2018 when the stock was at the level of $57. So, let us review if INTC can bring positive surprise to investors in the near future.

Q4 revenue growth is worse than expected, but the results are still good

In Q4 2018, Intel generated $18.66 billion in revenue, which was $360 million less than expected. The miss on revenue is a rare event for Intel, as it was the second miss on the metric in the last 10 quarters. Clearly, investors were disappointed by the result, which led to a sharp decline in the stock price. However, looking at the results more objectively, it becomes evident that Intel's overall financial performance is far from adverse.

Starting with revenue growth, although the metric was slightly less impressive than expected, the actual number of 9.4% should not be treated as a sign of stagnated business. In fact, it is the second highest growth in fourth-quarter sales since 2011 when the metric increased by about 21%. In absolute terms, Q4 revenue was the biggest in modern history, with annual revenue also reaching as high as $71 billion.

(Source: Zacks)

Moreover, regarding EPS growth, the numbers are even more remarkable. Non-GAAP EPS surged 18% in the quarter year-on-year, driven by a 10% increase in operating income, as the company used a smaller percentage of revenue for research and development, which is another sign of corporate efficiency. For the full-year 2018, EPS increased by 32%, with a 25% growth in operating income. This shows that Intel is able to generate solid returns for the investors even under the pressure of competition and slow macroeconomic dynamics.

There is also a lot of negativity in the media regarding Intel's data center segment performance. However, the numbers here again clearly show that the dynamics are not as bad as they can appear. Data center group expanded by 9%, with double-digit growth in the cloud and communication service provider segments.

DCG achieved 24 percent cloud segment growth and 12 percent communications service provider segment growth while enterprise revenue declined 5 percent. Intel recently announced that the new "Cascade Lake" family of high performance Intel® Xeon® processors with advanced AI and memory capabilities is now shipping.

(Source: INTC Q4 Earnings Release)

Mobileye, the automotive unit of Intel, again improved its sales by hefty 43%, showing that the parent company did not make a mistake with acquiring the Israel-based corporation. Therefore, the automotive segment is slowly becoming a strong source of revenue for INTC, which contributes to the process of revenue diversification.

Finally, memory business (Non-Volatile Memory Solutions Group, known as NSG) grew substantially by 25% year-on-year. This was achieved despite multiple warnings from institutions and media that the memory market would struggle from oversupply and a decline in prices.

The company provided cautious guidance, as competition becomes tougher

One of the negative points in the earnings release was guidance. For FY 2019, Intel projects revenue and EPS growth to be almost flat, around 1%, compared to 2018. In more detail, sales are expected to reach $71.5 billion (vs. a consensus of $73.1 billion), while EPS is guided to be $4.6 (vs. a consensus of $4.51). Despite the fact that the company came short of expectations, the actual numbers again do not look as negative as it might appear, especially when it comes to earnings.

Regarding the "problematic" data center revenue, Intel expects mid-single digits growth in the metric year-over-year in 2019. It was mentioned during the latest earnings call that the management expects "competition to be stronger as they go through '19," but the guidance is stated to incorporate the fact that Intel is "going to fight to protect its position." It is clear that the competition is likely to come from AMD, as the company has been able to gain solid traction in the data center business. The major point here is that Intel is likely to have a difficult year ahead, but the company's solid financial execution can act as a safety net.

Despite certain risks, Intel stock is a solid long-term buy, with a 2.5% dividend yield, 10 forward P/E, and 32% EPS growth

Overall, it is seen that Intel's actual financial performance is significantly better than it might appear from the news. The company has been able to build an efficient corporate structure over the recent years, which helps Intel remain a viable corporate entity during tough times.

Based on Intel's strong financial execution under adverse conditions, the stock can act as a relatively safe investment in the times of slowing macroeconomic environment. Such events as the slowdown in the Chinese economy and a temporary saturation in the data center market are likely to influence certain chipmaking companies and their shares in the coming year. And here, the recent sell-off in INTC may present an attractive opportunity for long-term investors.

Hence, after the recent dividend hike, the forward dividend yield went up to about 2.5-2.7%. An increase in dividends is usually treated as a sign of management's confidence in the future of a company. The corporation also continues to execute its substantial buyback program, as Intel spent $2.266 billion on share repurchases in Q4 2018 alone. Importantly, Intel generates enough free cash flows (almost $6 billion in Q4 2018 vs. $3.6 billion spent on dividends and buybacks) to cover the capital return program without significant risks.

Data by YCharts

Regarding valuation, the initial look at the numbers demonstrates that the stock provides a favorable margin of safety. After the recent sell-off, INTC's P/E ratio went down to about 10, which is on the low end of the yearly range. Considering Intel demonstrated a 32% growth in EPS in 2018, the current PEG ratio is about 0.3. Even though the company projects EPS growth to be around 0.5% in 2019, it is reasonable to assume the actual metric will be slightly higher than $4.6 per share. Additional details on valuation can be found in my previous article on INTC: Intel Stock Is In Buy Territory (Again).

Therefore, strong financial performance, low P/E, solid dividend yield, and a continuing buyback program make INTC a good long-term investment.

Disclosure: I am/we are long AMD, INTC. 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.