Intel Is Set to Carry on its Impressive Profitability

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Intel Corporation (NASDAQ: INTC) is the biggest chip maker in the world. The company designs, and produces communications and computing components, like chipsets, microprocessors, wireless and wired connectivity products, and motherboards. Intel is a stock, which offers an attractive dividend yield at a reasonable price. Its EPS growth, dividend yield, growth prospects, lower PEG and strong asset base make Intel an effective dividend choice.

Intel has an impressive dividend yield of 3.90%; this represents a strong return as not many companies show such attractive yields. Additionally, the firm has shown a remarkable growth in EPS at the rate of 37.5%. Intel has a strong asset base and an extremely attractive PEG ratio of 0.92. In this article, I analyze the debt, profitability and cash flows using different metrics. All the data for analysis is taken from the company's annual reports.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2010</strong></p> </td> <td> <p><strong>2009</strong></p> </td> </tr> <tr> <td> <p><strong>Operating Profit Margin</strong></p> </td> <td> <p>32.37%</p> </td> <td> <p>35.73%</p> </td> <td> <p>16.26%</p> </td> </tr> <tr> <td> <p><strong>Net Profit Margin</strong></p> </td> <td> <p>23.97%</p> </td> <td> <p>26.28%</p> </td> <td> <p>12.44%</p> </td> </tr> <tr> <td> <p><strong>Operating Cash Flow to Sales</strong></p> </td> <td> <p>38.82%</p> </td> <td> <p>38.26%</p> </td> <td> <p>31.80%</p> </td> </tr> <tr> <td> <p><strong>Free Cash Flow to Operating Cash Flow</strong></p> </td> <td> <p>48.65%</p> </td> <td> <p>68.81%</p> </td> <td> <p>59.58%</p> </td> </tr> <tr> <td> <p><strong>Capital Expenditure Coverage</strong></p> </td> <td> <p>1.95</p> </td> <td> <p>3.21</p> </td> <td> <p>2.47</p> </td> </tr> </tbody> </table>

Over the past three years, Intel has demonstrated impressive profitability. The operating profit margin has almost doubled during the past three years. Intel's operating profit margin went up to 35.73% in 2010. However, in the following year, operating profit margin decreased a little and came down to 32.37%. Intel has been able to achieve impressive profitability due to a fall in overall cost. The firm has been able to reduce its costs while increasing its revenues significantly. As a result, the operating and net profit margin showed substantial improvement over the past three years. However, during the current year, the firm has faced declining revenues due to the slowing PC market and the company decreased its third quarter outlook in September.

Further, Intel's cash flow situation is in ideal condition as almost all of the metrics show encouraging signs. Cash flows from operations as a percentage of sales have increased by almost 7% during the past three years.

At the end of 2009, cash flows from operations to sales ratio stood at 31.80%, which went up to 38.82% by the end of 2011. However, free cash flows as a percentage of cash flows from operations have declined due to increased capital expenditures. As a result, capital expenditures coverage ratio has also recorded a declining trend, but the ratio still remains in a solid position. Capital expenditures are an integral component for Intel and over the past three years; it has more than doubled. The capital expenditures will carry on with its trend through at least 2013. Let’s take a look at the capital expenditures of the company over the past three years and next two years.

Capital Expenditures:

In the technology sector, things change rapidly and make it imperative for companies like Intel to spend significantly and keep up with the needs of the market. As the PCs market declines, Intel needs to come up with the chips, which can capture the tablets and smart phone markets.  During the past three years, Intel mainly invested with a view to achieve cost efficiency while manufacturing more efficient chips. In 2009, Intel manufactured 32nm chips and spent almost $16 billion over the next two years to manufacture 22nm chips. Intel’s move to 22nm chips cost it $5 billion in new investment costs. In addition, a hefty amount was spent on research and development. Intel is currently working on developing 14nm chips, and the capital expenditures will remain around $12.1 billion for the company during 2012.

As a result of these capital expenditures, overall cost for Intel will come down significantly during 2012 and 2013. Intel is likely to spend further $13 billion in capital expenditures in 2013. At present, the company plans to develop 10nm, 7nm and 5nm chips by 2015. Intel has a competitive advantage over its competitors through its unique product manufacturing, process leadership and technology leadership. I believe the capital expenditures will help the company raid the tablet and smart phone markets through smaller and efficient chips.

Another avenue of expansion for Intel could be as a foundry services business. However, the current CAPEX is solely for internal use of the company, although, the company admitted that it can be a strategic foundry partner for select customers. However, if Intel were to expand into foundry services, it would require higher spending.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Intel</strong></p> </td> <td> <p><strong>AMD</strong></p> </td> <td> <p><strong>Qualcomm</strong></p> </td> <td> <p><strong>ARM Holdings</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>9.90</p> </td> <td> <p>N/A</p> </td> <td> <p>20.90</p> </td> <td> <p>57.5</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>2.40</p> </td> <td> <p>2.50</p> </td> <td> <p>3.20</p> </td> <td> <p>7.20</p> </td> </tr> <tr> <td> <p><strong>P/S</strong></p> </td> <td> <p>2.30</p> </td> <td> <p>0.50</p> </td> <td> <p>5.80</p> </td> <td> <p>15.4</p> </td> </tr> <tr> <td> <p><strong>EPS Growth</strong></p> </td> <td> <p>37.50%</p> </td> <td> <p>N/A</p> </td> <td> <p>12.40%</p> </td> <td> <p>34.10%</p> </td> </tr> <tr> <td> <p><strong>Operating Margin</strong></p> </td> <td> <p>31.20%</p> </td> <td> <p>-4.60%</p> </td> <td> <p>31.00%</p> </td> <td> <p>35.70%</p> </td> </tr> <tr> <td> <p><strong>Net Margin</strong></p> </td> <td> <p>22.70%</p> </td> <td> <p>-9.90%</p> </td> <td> <p>32.10%</p> </td> <td> <p>26.90%</p> </td> </tr> <tr> <td> <p><strong>ROE TTM</strong></p> </td> <td> <p>25.40%</p> </td> <td> <p>-45.90%</p> </td> <td> <p>20.00%</p> </td> <td> <p>13.60%</p> </td> </tr> <tr> <td> <p><strong>Debt to Equity</strong></p> </td> <td> <p>0.20</p> </td> <td> <p>1.40</p> </td> <td> <p>0.00</p> </td> <td> <p>0.00</p> </td> </tr> </tbody> </table>


The key competitors for Intel Corporation are Advanced Micro Devices Inc (NYSE: AMD), Qualcomm (NASDAQ: QCOM) and ARM Holdings (NASDAQ: ARMH). From the table above, it is obvious that Intel is trading at a discount compared to its competitors based on multiples. Although, ARM offers attractive margins, the stock is trading at a considerable premium. I think ARM has great business prospects, but the future growth is already more than fairly reflected in the stock price.

AMD is having a tough time these days. A few years ago AMD was a remarkable champion against Intel’s dominance in the microchip field. However, even though the company offered lower prices, it just could not compete with Intel’s technology. I still think AMD should stay in the business, but I have my own doubts for AMD’s future.

Qualcomm is not a direct competitor of Intel. But some of its products compete for Intel’s customers. I think Qualcomm is a great buy on dips, but currently the stock is trading near 52-week highs. Therefore, I would recommend waiting for a better entry point below $50.


Intel is the leader in its industry and demonstrates extremely impressive profitability metrics. It is evident from the analysis that the firm has improved its operations over the past three years. At the moment, the firm is in a stronger position as compared to three years ago. In addition, the increase in the operating cash flows indicates the company is converting most of its sales into cash flows. I believe Intel is in a strong financial position, and the firm is well set to carry on its impressive profitability.

Know What You Own

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors have understand with the chip giant. Better yet, you'll continue to receive updates as news develops for an entire year. Click here now to learn more.

ecofinstat owns shares of Intel. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus