Is Intel Able to Turn It Around?
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Will the ongoing tumble in shares of Intel (NASDAQ: INTC), the global leading PC processors makers, end anytime soon? The results of the third quarter financial reports and the rise in the company’s credit default swaps suggest the recent drop in investors’ confidence in this chip maker might further drag down the stock. The company continues to dominate the desktop market and is still growing in Asia including Indonesia and India. Nonetheless, is the company doing as bad as many think? Let’s examine the recent financial report of the company and its performance compared to its competitor.
Intel and NASDAQ
The company’s stock continued to dwindle and underperform the market: during the past several months (September to November) the stock has declined by nearly 18%. In comparison, the NASDAQ index has fallen during said time by almost 5%. The chart below presents the changes of the NASDAQ and shares of Intel during the past several months (prices are normalized to Aug. 31). As seen, both Intel and NASDAQ didn’t perform well in recent months.
Intel and CDS
Intel’s credit default swap (five years, in $) has risen in recent months: it has increased from nearly 39 back in April 2012 to nearly 55 as of last week. This represents an increase of 73%. The current price means the annual premium is $55 thousand in case of a default of $10 million of debt within the next five years. The chart below shows the developments of the five year CDS price in past years (weekly prices).
The rise in the company’s CDS suggests the market estimates a higher probability of default than earlier this year. The probability is still low, but the recent hike isn’t something to dismiss. Moreover, the recent fall in the company’s stock price may have also contributed to the rise in CDS.
Intel's Financial Reports
The recent third quarter financial reports of Intel weren’t too positive: the company’s revenues declined by nearly 0.3% compared to the second quarter of 2012 and by 5.5% compared to same quarter in 2011. Moreover, the company’s operating earnings also fell nearly 15% compared to the Q3 2011. Nonetheless, one reason for the drop in operating earnings was the rise in research and development expenses: in Q3 2012 the R&D provision rose by nearly 22% compared to Q3 2011. This provision is nearly 27% of the total operating expenses. The rise in R&D suggests there is potential future growth, if the company’s innovations will convert to sales.
Despite Intel’s disappointing third quarter financial report, there is a silver lining: the company has a relatively high profit margin: the company’s operating profitability is in the middle of the pack compared to its main competitors such as ARM Holdings (NASDAQ: ARMH) and QUALCOMM (NASDAQ: QCOM). As seen below, the operating profitability of Intel reached nearly 28% in the third quarter. In comparison, ARM’s profitability was almost 36% and QUALCOMM’s operating profitability reached 25%.
At least Intel is offering a much higher dividend yield than its major competitors: as of the recent quarter the company offers a $0.22 quarterly dividend, which is nearly a 4.49% yearly divided yield. In comparison, ARM only pays a $0.08 quarterly dividend, which comes to a 0.49% yearly divided yield; QUALCOMM is offering a $0.25 quarterly dividend, which reaches a 1.61% yearly divided yield.
The Foolish Bottom Line
Intel isn’t doing well: the company’s stock is falling, its CDS are rising, and the revenues and earnings are falling. Nonetheless, the company is still showing high profit margins and dividend yield. Moreover, Intel’s chances of reaching high growth in revenues are low but do exist. The company still has a chance of expanding to other products including tablet and smartphones. Currently, however, it seems as if the market estimates little to no chance of the company growing again. This sentiment might be excessive.
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