The Best Global Chipmaker for Long-Term Investors

By Anh HOANG - October 20, 2012 | Tickers: AMD, BRCM, INTC, NVDA | 0 Comments

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Intel (NASDAQ: INTC), the biggest chipmaker globally, just reported its third quarter results. As expected, the tough economic environment and weak PC industry has affected the business. All revenue segments experienced a decline, either year-over-year or sequentially. The PC Segment’s revenue was $8.6 billion; 8% lower than the same period last year but flat compared to the prior quarter. The Data Center segment, with $2.7 billion in revenue, was down 5% sequentially but 6% higher than last year. Intel's Other architecture segment, with $1.2 billion in revenue, was up 6% sequentially but 14% lower than the same period last year. 

Intel is still heavily focusing on the PC industry. We can see that out of the $13.5 billion for the third quarter, 63.7% was from the PC segment. The global PC industry is facing headwinds as more and more people now use smartphones and tablets, switching away from the PC. PC shipments in July-September were 87.8 million, indicating an 8.6% decline in demand year-over-year. So we should expect that it will affect Intel’s operating performance in the short-term. 

The company said that with $5.1 billion cash generated from operations, it would use $1.1 billion to pay dividends and $1.2 billion to repurchase stock. So Intel is trying to create more shareholder value in two ways. First is to pay dividends to current shareholders. Second, repurchasing stock leads to the reduction of the number of shares outstanding, so its earnings and cash flow per share will be further enhanced. 

Indeed, Intel has a quite strong balance sheet; the D/E is only 14.4% with $49.3 billion equity and only $7.1 billion debt.  Over the trailing 12 months, Intel’s diluted EPS is $2.29. Currently, the stock is trading at $22.35; the market capitalization is $111.82 billion. So, its TTM P/E ratio is 9.76x, and the current P/B ratio is 2.27x.

Historically, Intel is a cash cow. Over the last 10 years, Intel kept generating positive free cash flow. The annualized growth of free cash flow for that period is 11.8%.

Averaged over 10 years, Intel’s free cash flow is $7.7 billion. With the current enterprise value of $102.23 billion, the EV/FCF is nearly 13.28x. The trailing twelve months earnings before taxes (EBT) is $16.25 billion, so the EV/EBT ratio is only 6.29x. The EV/EBT ratio seems to be very low, how about its historical ratios?

We can see that the current EV/EBT ratio is among the lowest in the last 10 years. In 2003, it was as high as 24.13x, and in 2009, it was 17.68x.

Compared to its peers including Advanced Micro Devices (NYSE: AMD), Broadcom (NASDAQ: BRCM), and NVIDIA (NASDAQ: NVDA), Intel is the best for investors, as it has the most attractive operating figures and valuations.

Intel has a decent debt/equity ratio and its net margin is more than double that of NVDA and BRCM. In addition, its P/E and EV/EBT is the lowest among the four. AMD generated losses so the P/E and EV/EBT ratio is not valid. Investors, when seeing this comparison table, should notice right away that Intel is the best performer among the four. Indeed, over the last 52 weeks, Intel experienced the lowest decline in its share price, -6.1%. AMD’s share fell the most, off -42.61%. NVDA’s and BRCM’s stock performances are -11.9% and -8.14% respectively.    

My Foolish take

Personally, I think Intel is a good stock to invest now for long-term investors because of the following:

• An attractive valuation of 9.76x P/E and 6.29x EV/EBT.
• The stock is cheap compared to its historical valuation and its peers.
• Best operating performance among its peers.
• Consistent positive free cash flow.
• High dividend yield of 4%.

Foolish Bottom Line

Intel's name is synonymous with the semiconductor, but savvy investors like yourself should constantly question whether there is a profit opportunity left from the stock. Thankfully, the Motley Fool has assembled a special report detailing the opportunity, risks, and Foolish bottom-line analysis on the company. Today, you can gain instant access to this report by simply clicking here now.

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