Will Buffett Buy This Company Next?

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

There are many good companies, but there are very few truly great companies. Berkshire Hathaway (NYSE: BRK-A), with a cash pile of $34 billion, is always on the lookout to buy great companies trading below their intrinsic value. A truly great company should be vastly superior, both in quality and in size, to its industry peers. It should be able to maintain a high profit margin on the products it sells. And most importantly, it must be a shareholder friendly company with enough dividends and share buybacks to keep its investors happy. Of course, this ideal company should trade at cheap enough a price for us to step in and buy shares. 

After a plunge of 30% versus a 20% rise in the S&P 500 in this past year, shares of Intel (NASDAQ: INTC) are finally trading for the right price.

The ultimate company to own

I believe that at these prices, the giant chip manufacturer presents an excellent buyout opportunity for Mr. Buffett. Intel is bound to deliver fantastic returns to shareholders in the future, for the following reason:

Consistently thick profit margins

Back in 2009, the Intel's gross profit margin was around 55%. In 2012, it was just over 62%. Intel's net profit margin has fluctuated between 12% and 26% over the last several years. So even at the low end of the range, it's earning very thick net margins. Last year, net profit was toward the high end of its historical range, at 21%.

Generally speaking, a strong profit margin is a sign you're selling something the world places a high value on. Intel's products are as valuable as ever to its customers. Hence, it matters a lot less that sales were down 1% in 2012 than it does that profit margins remain strong.

Market dominance

Intel generated about $7.9 billion in free cash flow last year on sales of more than $53 billion a year. It beats all its competitors in annual sales – by a long shot. Taiwan Semiconductor (NYSE: TSM) does only about $17 billion a year. Advanced Micro Systems (NYSE: AMD), the much smaller competitor, has only about $6.5 billion worth of sales annually. And since they're smaller, it's probably harder for them to make as much money as Intel on any given type of chip. It's a crowded race and Intel is way up front.

The irony of the matter is that Mr. Market is willing to attach a very rich earnings multiple of 18x to to TSM, while Intel deserves a P/E of only 9x. That's a great example of very poor decision making by Mr. Market.

Fortress balance sheet

Intel has about $18.1 billion in cash and investments and just over $13.1 billion in debt. To put that into perspective, it could pay off all its debts and still have billions of dollars left over. I'd bet there will never be a financial crisis at Intel. Its balance sheet makes it one of the safest stocks in the world.

Shareholder-friendly company

Intel pays out virtually all its free cash flow in dividends and share repurchases. In recent years, as its free cash flow waned, it's continued to grow its shareholder value by paying out more in dividends and share buybacks than it has in free cash flow. As of last year, the company paid $4 billion back in the form of dividends and purchased $12 billion worth of shares.

Intel has a strong dividend-paying history. It's paid one every year since 1992 and it has raised its dividend 18 of those 20 years – it's never cut it. Its current yield of 4.4% is among the highest on the Dow Jones.

Looking ahead 

Intel is an attractively priced, cash-gushing business. I believe it will keep rewarding investors with dividends and share repurchases in the years to come. I believe that sooner rather than later, Mr. Buffett will step in and purchase a substantial chunk of Intel. I recommend you buy shares before he does. 

shmulikarpf has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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