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Intel’s Report and How MarketGrader Works

|Includes: BKNG, Intel Corporation (INTC), NFLX

Since Intel’s remarkable report on Tuesday afternoon much has been written about the meaning of the technology bellwether’s numbers. Particularly during a time of economic uncertainty around the world and diverging fortunes for large, well-capitalized multinationals and small, cash strapped businesses in the U.S. We would like to offer MarketGrader’s analysis of the company’s report not so much to divine trends for which qualitative analysts are better equipped but as a way to show our readers how a combination of our sound quantitative analysis with responsible portfolio management practices (diversification, rebalance, long term focus) will serve them well across all economic climates.

 As many frustrated investors can attest, owning INTC in the last few years has been, well, frustrating, to say the least. Production and development issues seem to whip the stock every time investors settle for what they hope will be a smooth ride with a market leader. However, most investors in INTC stock know that moving the needle on a $115 billion market cap Dow component giant is more of a longer term affair than, say, owning the likes of PCLN or NFLX. And this is where MarketGrader can offer some unique perspective. As such, all numbers reported in this article are based exclusively on what our subscribers can find at, not only for Intel but also for all companies under coverage. So, without further delay, to Tuesday’s report.

INTC didn’t just beat the consensus estimate; it crushed all expectations not only for EPS (both GAAP and pro forma) but also for revenues, which usually say more about the company’s ongoing growth than the fickle bottom line. Intel’s Q1 revenue of $12.88 billion was 25% higher than the equivalent period in 2010. More impressively, it exceeded top line estimates by $1.26 billion. This means that in a single quarter the company was able to produce over one and a quarter billion dollars in additional revenue than what Wall Street was expecting (true, following the company’s revenue guidance). Guidance aside, for a company of this size, the number is truly remarkable. A few more highlights, which you can read about in MarketGrader’s report:

-       Quarterly net income jumped 29.4% year-over-year to $3.16 billion.

-       Trailing 12-month net income increased 79.6% from the same period three years before to $12.18 billion.

-       Trailing 12-month revenue of $46.2 billion is 18% higher than it was three years earlier.

-       Gross margins are now a remarkable 75.2% (NYSE:TTM) compared to 72.5% a year earlier.

-       Operating margins improved to 35.3% (TTM) from 29.7% in the period ended on 3/31/10. (This is how market share is gained).

-       Return on equity over the last 12 months was 25.7% while Economic Value Added, which takes into account the company’s cost of equity and debt (virtually zero), was 24.8%.

-       INTC has beaten the consensus estimate by an average margin of 26.3% in the last six quarters.

Following the announcement Intel became the highest graded company in all of (we follow close to 5,800 North American listed stocks) with an overall grade of 94.69 (an almost perfect score out of a possible 100 points). From a Value perspective the story is (even more) compelling. If using the Value profile function to recalculate the stock’s overall grade (this allows our clients to emphasize our Value indicators in the overall grading methodology) the score jumps to 96.29. This, however, is not surprising given that even after yesterday’s jump of more than 7% INTC still trades at 9.56 times trailing 12-month EPS and 10.55 times next year’s estimates. It also trades at 2.77 times tangible book value, which excludes goodwill and other intangibles. These assets account for only10.9% of stockholder’s equity, which is not only a small amount for a technology company that spends $1.6 billion in R&D each quarter but also underscores its management’s prudent style. Adding intangibles back into stockholder’s equity lowers price to book to 2.47. And compared to its peers, using price to sales, the company’s shares trade at a 15% discount to the Semiconductor industry average.

How To Interpret the Report Using MarketGrader?

 All of the figures mentioned above are clearly spelled out in MarketGrader’s INTC report (which was updated Tuesday night following the report and once again last night following the impact of the announcement on the stock price). However, when analyzing INTC using our tools at our clients are able to go beyond the headline numbers and interpret the results from many different angles.

In our Snapshot report view, they may see, across four columns, the impact each one of the last four quarterly reports had on each of our 24 fundamental indicators and our overall grade. Following Tuesday’s report five of our 24 grades improved while only one deteriorated but not by much: our Price/Sales Ratio indicator fell from A+ to A.

Our Top Down Analysis provides context, particularly for investors more concerned with the short-term performance of the stock. Since INTC is now the highest graded company in all of MarketGrader, it is obviously the highest graded one in the Technology sector and the Semiconductor sub-industry. However, the analysis flags a couple of warning signs: the sector is showing a Neutral rating based on our price trend and momentum analysis while the sub-industry shows a Negative rating based on the same criteria. Investors can click on our Industry Analysis section to see how these sector and sub-industry ratings compare to all other groups in our system. The last section of our Top Down Analysis is our Sentiment indicator, which now has its own, dedicated page.

Intel’s Sentiment analysis page shows a Neutral rating for the stock based on our four sentiment indicators. It shows that despite yesterday’s jump the stock’s current price trend is still negative as is its momentum. These are likely to improve if current excitement for the stock holds. Our Earnings Guidance and Short Interest indicators show much better grades for INTC; all four indicators are summed up into a final 5.1 Sentiment score (out of 10).

 In our Earnings & Dividends page our Dilution Analysis sheds further light on the company’s latest earnings report as well as the previous seven. The analysis is designed to account, on a per share basis, for the impact the company’s dilution has on its shareholders or, in many cases, how stock buy-backs affect the bottom line. For INTC’s latest report in particular, our Dilution Analysis shows that the company reported fully diluted EPS of $0.56 excluding extraordinary items (as opposed to the headline report of $0.59 per share). Compared to the year earlier EPS of $0.43, the company’s earnings grew 31%. During that same period Intel retired about 1.3% of its outstanding common shares, giving a small boost to its EPS growth. Had its shares outstanding remained the same, the company’s earnings growth would have been 29% as one cent per share is attributed, in our analysis, to the impact of its ongoing share buy-back program. This shows that, while Intel is continuously buying back shares the recently reported growth really came from its operations as opposed to ‘fabricated’ earnings when counting them over a smaller share base. This analysis is helpful in gauging the quality of a company’s report when reported growth is high or, for companies issuing shares, in measuring the bottom line impact of diluting shareholders. And speaking of shareholder rewards, investors can track the history of the company’s dividend payments on this same page. Intel in particular has been regularly increasing its dividend annually (although in 2008-2009 it held its dividend constant for a little longer than usual) and it now pays 18 cents per share.

 So what do all these numbers and analyses mean to an investor using to build, follow and maintain a portfolio? The analysis of Intel’s report is nothing more than an illustration of following a disciplined, objective and thorough research methodology. Doing so has to be combined with a commitment to building and maintaining a balanced and diversified portfolio with soundly managed companies that are growing but whose shares can be bought at a reasonable price (GARP). INTC investors have seen the stock move sideways for the better part of the last year and a half so this might not be the stock that provides the boost to their portfolio. Nevertheless, the stock is up almost 16% since MarketGrader last upgraded it from a ‘Sell’ on August 15th, 2009. Regardless of when any given investor might have bought the stock and based on recent history, investors have been paid upwards of 3% annually through dividends during a time that the S&P has had an annualized return of -5%. Companies such as Intel, thus, serve as anchors of any prudently managed portfolio. Using MarketGrader, investors can use tools such as our Idea Generators, our Advanced Search or our Stocks on the Move to find the stocks that might provide the portfolio some extra boost. And if they want the full stock picker plus portfolio management solution, the MarketGrader indexes or Barron’s 400 might be the best way to go. The MarketGrader Technology Index, for example, is up a cumulative 39.12% in the last three years compared to the S&P 500 Technology index, up 12.72%. And the Barron’s 400 has gained 1% and 3.7% per year in the last three and five years while the Dow has lost 4.4% per year in the last three while gaining only 1.6% per year in the last five. A common staple of all of these indexes? Intel Corp., which goes to show that portfolio design and maintenance is as important as stock selection. can help you with both. 

Note: Most of the pages and features mentioned in this article are also available to subscribers of the MarketGrader Research App on Seeking Alpha. We encourage you to take a free trial.