US Stock: Intel Corporation Jan 2013

Company Profile
Intel is still the biggest semiconductor company in the world. Intel has its Atom microprocessor for smart phones. There is a growing trend of mobile phones with internet access such as the iPhone, Android and BlackBerry. Intel plans to use its atom microprocessors to try to enter the mobile phone market industry. How has that been going? Let's take a look at the revenue breakdown from the Annual Report of 2011. 

• PC Client (desktop + laptop markets): $35.4/$54 =  65.55%
• Data Center (servers): $10.1/$54 = 18.70%, 
• Software (e.g. McAfee) = 3.46%. 
• This effectively means only ~12% is attributable to Intel Mobile Communications (IMC), the Intelligent Systems Group (ISG), the Netbook and Tablet Group (NTG), and the Ultra-Mobility Group (UMG). 

With PC sales being stagnant and losing ground (see graph and purple regions) to smartphones + tablets after 2011, market environment is tough for Intel to sustain revenue growth unless they start entering this new market more SERIOUSLY. This remains the biggest risk and turning point for Intel: Whether they can be relevant in the smartphones + tablet market.

Source: 2012 KPCB Internet Trends

Financial Charts

#1 Profit Margin (red line) for Intel is pretty decent on an average of 20%. I take into account cost for R&D as well as marketing to get the final tally of profit margin because they are still essential COST in order to run the business. Intel is smart at boasting about gross margin which is always above 55% for the last three years but what matters to me is profit margin.
#2 ROA (green line) and ROCE (aqua line) looks fine. As long as they correlate with each other, Intel is using its available resources wisely.
#3 The jump in revenue growth rate (orange line) for 2010 is nothing special, first due to the recovery in demand from the global crisis and second because Intel has now monopolized the PC processor market thanks to AMD not wanting to compete head to head anymore. By looking at revenue figures of 2011 together with the upcoming 2012 expecting a revenue of $53.8 billion, market has saturated. Thus I am not expecting any MIRACLES to see a big jump in growth rates anymore.

#1 EPS is growing healthily though this again is highly dependent on Intel making more and more money. The other more sneaky way of improving this ratio without having to generate more profits is by exercising share buy backs, this is what Intel has been doing for the year 2012. Though share buy backs is a positive move as long as the company has a healthy cash reserve it is nevertheless not a better option compared to increasing revenue. Hence take it with a pinch of salt.
#2 DPS has been on the increasing trend. The payout is still affordable to Intel and the payout ratio is not alarming. Btw as a semiconductor company, Intel's attractive dividend yield of 4% is one of the best in the tech industry. Impressive move by Intel to attract or keep investors like institutional funds happy.

Discounted Cash Flow Analysis
Projected Revenue Growth Rate: 4%/each year for the next 5 years til 2017

Operating Costs: 80% (includes cost of goods, R&D and marketing)

Corporate Tax: 24% (based on annual report 2011)

Capital Expenditures: $5.5 billion +4%/year 

Depreciation: $4.5 billion +4%/year

Working Capital Cost: same as projected revenue growth rate

Discounted Rate: 15%

Intel's fair value is priced roughly at $20.24. Push the revenue growth rate to 5% and you can value it at $21.01. The current stock price of $22.00 makes Intel within the fairly valued zone. Aboi still holds Intel being valued at most $25.00 (unchanged since my first analysis back in year 2010).

This is how my custom made DCF model input table looks like (Part 1)

This is how my custom made DCF model input table looks like (Part 2). Fair value computed below.

Technical Analysis

Using VSA (volume spread analysis) technique, you can google it, I would say Intel is in an accumulation stage now where the price would hold roughly within the fair value. The accumulation stage is where market professionals would try to buy as much shares as they can, without SIGNIFICANTLY putting the price up against their own buying. I believe this would happen until the Q2'13 results are out (which is usually Intel's strongest quarter). The key indicator of this would be ultra-high volume leading to the mark-up stage. We will take a look again in a few more months. Btw I sold most of my holdings at $26-$27 region halfway during the distribution stage last year, so for now Aboi says:

Target price: USD21.01 HOLD
Fundamentals: Short Term Market Perform (1-year period)
Technical: Medium Term Bullish (6-month period)
Risk Level: High

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.