Weekly Stock Call

April 12, 2011
Current Price – US$19.94


Intel Corporation (INTC) is the world’s largest semiconductor chip company developing advanced integrated digital technology for industries such as computing and communications.
Annual revenues of 43.6 $US B are derived from the four primary business segments: PC Client Group (PCCG) – 72%, Data Center Group (DCG) – 20%, other Intel architecture (Other IA) – 4%, and all other – 4%. 

The company has a rock solid balance sheet with a current ratio of 3.4 and debt to equity of just 4.3%, strong, resilient margins (operating margin 35.5%), and is churning out tons of free cash flow (26% of revenues). Markets for Intel’s products continue to be driven by increased demand for personal connectivity, data centre growth for cloud computing and emerging markets growth. While the company faces heavy competition in all of its major markets, it continues to lead its significant competitors in operating and R&D efficiency, brand recognition and overall scale.

I view this company as a mature firm returning earnings to shareholders through dividends and share repurchases while still possessing an option for considerable growth, and I consider it to be currently under-priced.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount method and historical and industry price ratios) I arrive at a current valuation for Intel Corporation of US$25.45

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield          27.6%
Dividend yield      3.6%
Total return        31.3%


Risks

Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Demand Fluctuations - due to unfavorable economic conditions or shifting consumer preferences can result in underutilization of Intel’s considerable fixed asset base and materially impact earnings and cash flows. Many of Intel’s direct competitors have relatively less fixed cost exposure.

Market Response – given an environment of rapid product evolution and short product life cycles, a failure to respond quickly customer demands, or to appropriately anticipate those demands, could adversely impact earnings.


The Numbers

Share Price ($US)   19.94 
Market Cap ($US B)   111.5 
No. Shares (M)   5,696 
ROE   25.2%
ROA   19.7%
P/E Ratio   9.2
Price/Sales Ratio   2.7
Price/Book Ratio   2.3
Current Ratio   3.4
Interest Coverage   146.2
Total Debt/Equity   4.3%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

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