Is Intel's Growth Story Still Intact?
Steve 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 world’s largest and most well known chipmaker with a market cap of $127 billion that controls roughly 80% of the global PC chip market. The shares are now roughly 14 percent below their 52-week high of $29.27 where they traded a few months ago and for the past few years they have been stuck in a narrow trading range. In fact the shares are trading at about where they were in early 2008 when the company’s earnings were less than half of their 2011 earnings.
Intel has a current dividend yield of about 3.3%. The dividend is very safe and has grown at a steady clip since its inception and has never been reduced. In fact the dividend is up 16% from where it was a year ago and roughly 110% over the last 5 years. Intel has one of the best dividend growth track records that I have seen and if it stays on its current trajectory it will yield over 7% within 5 years if the stock price stays where it is. This shouldn’t be very hard to do since it currently has a payout ratio of only 34% leaving plenty of room for future dividend increases.
Currently, Intel is trading at a fairly attractive price-to-earnings ratio of about 10.7 based on the trailing 12 month period which is a significant discount to its industry and the S&P 500 which have price-to-earnings ratios of around 15 and 14 respectively. Its forward price-to-earnings ratio will drop to 9.6 based on next years consensus earnings estimate giving it a forward PEG ratio of just under 9.
Intel trades like a value stock but its growth story is still intact as it increased revenue by 24% in 2011 and delivered record revenue of over $54 billion amounting to $10.51 per share. Earnings per share were up sharply as well in 2011, increasing by 19% and earnings are estimated to advance another 5% by the end of this year.
It completely dominates its nearest rival Advanced Micro Devices, Inc. (NYSE: AMD), in almost every way and generates gross margins in excess of 60% that dwarf those of AMD. It has a profit margin of over 23% and returns-on-equity north of 26% for the trailing 1 year period. Contrast this with AMD which has a profit margin of negative (9.3%) and negative returns on equity of (46.4%) over the same period. AMD had negative earnings in 2011, but is projected to be profitable by the end of fiscal 2012.
Another element that bolsters the case for Intel’s growth story is the fact that for years the prices for microprocessors have been falling but have actually risen now for 2 years in a row and rose by 9% in 2011 according to the technology research firm IDC. This trend is expected to continue and shows that there is more demand for Intel’s microprocessors than is commonly believed.
I think another misconception about the company is that cloud computing will be a net negative for Intel as consumers won’t need as much power to run apps as they once did. So far this has not been the case and the data centers that enable cloud computing have relied heavily on Intel’s chips. I expect this trend to continue for some time.
Other tailwinds that could potentially propel Intel shares higher are the new Ultrabooks that have just come out and the recently announced Microsoft (NASDAQ: MSFT) product called the Surface tablet that will have a version that will run on Intel chips. The Surface tablet will be priced in the same general range as the Ultrabooks which the demand for has been less than impressive so far, but that could change as the prices are lowered to adapt to the changing demand. If the Ultrabooks and the Surface products catch on and become hot ticket items, that could boost Intel’s already lofty profit margins even higher and give earnings a significant increase.
Another potential tailwind for Intel is the much hyped Windows 8 that is set to launch in the coming months. I think the introduction of a new Microsoft operating system could lead to an upgrade cycle for PC’s as companies that have been hoarding cash and delaying technology upgrades are finally induced to replace their older machines with newer more advanced technology. It is estimated that more than 30% of PC users are still running XP as their operating system and a little less than 10% are still running Vista, so it appears that there is a large potential market for upgrades. The question is will Windows 8 deliver the goods? Only time will tell, but I anticipate that it will be well received.
Unlike many of its tech counterparts, Intel has a pristine balance sheet with a relatively low level of debt which gives it a debt-to-equity ratio of roughly 16. Also, the company has a whopping $13.75 billion sitting in cash and marketable securities. One thing is for sure, there is no bankruptcy in Intel’s near future!
With its strong cash flows and so much cash sitting idle, the company has been smartly buying back shares and has re-purchased about 538 million shares so far and will buy back another $8.6 billion worth of shares before it is done with its massive share buyback plan. I believe this shows that the management team at Intel is shareholder friendly and forward thinking as the reduction in shares will give a boost to the company’s earnings going forward.
Now for the negative, it is no secret that Intel dropped the ball with respect to the smart phone and tablet market, Intel assumed that its x86 architecture would be widely adopted, but due to the fact that they were designed for power and speed which tend to consume a lot of power, the industry went with more energy efficient chips produced primarily by ARM Holdings plc (NASDAQ: ARMH), and a few other companies that have managed to keep Intel at bay in this market segment, but probably not for long. Intel has recognized its mistakes and has taken corrective measures and has spent over $5 billion developing a new line of energy efficient chips called Atom which should enable its chips to be competitive and penetrate the smart phone and tablet markets and eventually make up any lost ground.
Through its economies of scale, Intel can afford to outspend its rivals in the mobile space by spreading research and development costs across a much larger sales and customer base and that gives it a huge competitive advantage. This along with its innovative prowess should allow it to become the dominant player in the smart phone and tablet markets over time assuming its new Atom chips deliver as promised.
Intel is essentially a very solid company with a strong management team that has an outstanding dividend growth record and trades at a bargain price. It will most likely weather the storm better than most companies and will offer income seeking investors a much better deal than they currently will get with Treasury bonds or CD’s. With its excellent growth prospects and massive stock buybacks the shares are poised to do well once things calm down and investors regain their appetite for riskier assets.
MidasInvestor has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Microsoft. Motley Fool newsletter services recommend Intel and Microsoft. 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.