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Wednesday, August 5, 2015

US Stock: Intel Corporation Aug 2015

Intel, Inc. (NYSE:INTC) is the world's leading semiconductor producer and has been the industry leader since the inception of the personal computer. Intel produces products for many facets of advanced technology including flash memory products, motherboards, wired and wireless connectivity products and networked storage products.


Price: $28.92

Target price: $30.69  
based on Discounted Rate of 8%

Fundamentals: Long Term Market Perform (5-year period)
Fundamentals: Short Term Bearish (3-month period)
Risk Level: High

**Outperform: Stock expected to do better than market return; has upside or cheap vs target price. Usually a buy call.
**Market perform: Stock expected to be on neutral, can be + - 3% to 5% either way; Usually a hold call.
**Underperform: Stock expected to do worse than market return; has downside or too expensive to buy vs target price. If fundamentals change a sell call.

If you want to skip all the below this is a good read if you have the time: Intel: Is There Hope For A Strong Future?

Financial Charts

Jan 2013: #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.
Aug 2015: Intel has made effort improve the margin by 5% over the last 5 years (up from 17% to 22%). This is good.

Jan 2013: #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.
Aug 2015: No change in my comment.

Jan 2013: #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.
Aug 2015: It came to no surprise that after the financial recovery the spike in growth will normalized. Worse still, Intel is expecting revenue for 2015 to be flat against 2014.

Jan 2013: #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.
Aug 2015: EPS has been maintained at record high levels. The share buyback program has had an impact to up 2014. I have voiced my concerns about this before: US Corp Share Buyback - Double Edged Sword. Intel could have used the $$ in R&D or acquisitions.

Jan 2013: #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.
Aug 2015: No change in comment. However with revenue not increasing, DPS will eventually plateau.

Discounted Cash Flow Analysis
Projected Revenue Growth Rate: 0% (2015), 3%/each year for the next 5 years till 2020
Operating Costs: 78% (includes cost of goods, R&D and marketing)
Corporate Tax: 26% (based on annual report 2014)
Capital Expenditures: $8 billion +3%/year 
Depreciation: $5.0 billion +3%/year
Working Capital Cost: same as projected revenue growth rate
Discounted Rate: 10%

**I use 3% is due to forecasted world GDP growth because semiconductor sales have shown about an 80% correlation with GDP growth trends, meaning a downturn in GDP growth could very likely be accompanied by a downturn in semiconductor sales.

Jan 2013:
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).
Aug 2015: 
Intel's fair value is priced roughly at $25.00. (back then projected revenue is to be around $62 billion by 2014, short of $6 billion now but thanks to better margins Intel has been able to maintain some free-cash-flow growth (FCF).

Intel desperately needs to find growth back, otherwise it is just a sitting lame duck. Data Center Group (servers) should continue to grow as the world needs more and more data and processing power. This will be Intel's domain for the foreseeable future. Mainstream PC sales (desktops and laptops) will decline further, suffering from competition on mobile where competition from ARM market is heavy and secondly margin is definitely thin. Intel's acquisition strategy is not yet very clear (purchase of Altera at $16.7 billion will take time to manifest). Intel's new memory tech with Micron is also too soon to tell. Benchmark numbers and more details are needed. I predict that Win10 will not help Intel that much. Reason being that for the first time Microsoft opted to let users try the new OS version for free - bypassing the need to acquire a new PC. Overall things are not so rosy - hence market perform on the long term. With looming US interest rate hike (equities value should drop) - hence the bearish rating for the short term. I hope you sold when Intel had the buyback fever 6 months ago, it was overvalued even by discounted cash flow calculations (now and back in Jan 2013). I did, all of them.

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