Is Intel a good stock to buy? Intel Corporation (INTC) revolutionized the concept of microprocessing. Its x86 series microprocessors form the basis of most of present day personal computers. Today, this highly valued semi conductor chip maker has a diversified geographical presence in Asia Pacific, North America, Europe and Japan. It also enjoys strong product diversification by selling platforms, which consist of a microprocessor and chipset, to original equipment manufacturers (OEMs), original design manufacturers (ODMs), and industrial and communications equipment manufacturers in the computing and communications industries. INTC develops and sells software and services as well, specifically those focused on security and technology integration.
We place a buy recommendation on this leading chip maker owing to its strong market share in both the overall worldwide PC microprocessor market (79.3%) and the mobile PC microprocessor (84.4%). This has ensured strong revenues for the firm over the past decade, and we expect the company’s standing to continue. Further, with the level of flexibility enjoyed by INTC thanks to its product diversification and geographic diversification, we do not see any major threat to earnings or cash flows in medium- to long-term. Moreover, a strategic partnership with Apple (AAPL) and INTC’s recent acquisition of McAfee are vital contributors to its market standing going forward, supporting our rationale for a buy rating.
Key Thesis Points
1. INTC is the market leader in the microprocessor market for personal computers as well as for mobile phones. Sometime in the 1990s, the company came close to losing its dominant position to its main rival, Advanced Micro Devices (AMD), but Intel is now stronger than ever. All its vitals, i.e. revenue, market capitalization, number of employees, EBITDA and EPS, far surpass that of AMD. More importantly, with a sales growth and net income growth (five year annual average) exceeding that of its industry’s, INTC is a profitable company. Further evidence of the company’s profitability comes from its gross profit (63.15%) and net profit (23.16%) margins, which are way ahead of that of its industry. On the contrary its competitor AMD incurred a loss of approximately $605 million, putting massive pressure on their margins. Going forward, we do not foresee any major threat for INTC from its competitors and expect the company’s profitability and cash flows to remain stable over the long term.
2. Management efficiency, measured via income per employee and revenue per employee, are at a higher level for INTC than what the industry expects. The situation is similar with regard to its receivable turnover and inventory turnover. This shows that the management is efficient enough, in that it collects on its credit sales and pushes inventory into sales more frequently than its peers. This also reflects the good relationships enjoyed by INTC’s management, especially down the value chain. This could be a critical source of competitive advantage for the company in the future – one which it could build upon, and eventually leverage, to beat its competition. Asset turnover (0.8) is at the level of the industry, which shows optimum asset utilization. INTC has shifted its balance of assets from current assets to long term ones, by investing in property plant and equipment in FY11. All this has led to an increase in revenues in the same year.
3. INTC has a strong liquidity position, since its current ratio (2.1) and quick ratio (1.8) are almost at par with the industry. On the other hand, INTC operates with a debt to equity ratio (0.16) which is slightly lower than the industry’s average (0.26), which reflects a prudent and cautious approach by its management, and shows that if there is a need to take on more debt, it can easily do so without entering into dangerous territory. On the returns front, again, all three measures of INTC exceed that of its industry: return on assets, return on equity, and return on capital.
4. INTC’s research and development expenses have gone up in FY11, which reflects its understanding of the industry in which it operates and a focus on finding ways and means to improve upon current product offerings, come up with new ones, and be better and faster and quicker than its competition. To maintain its position as the market leader, investment in R&D is crucial. The industry dynamics are such that companies cannot survive, let alone reach the level of Intel, without being proactive and responsive to the environment.
INTC is a growth stock with Price to Book value of 2.78x and a current PE ratio of 10.99, with a forward PE multiple to stabilize around 9.66. The Enterprise Value to EBITDA is at a stable 5.29, depicting good valuation prospects for the firm. The firm’s beta is 1.07, which explains the volatility profile of the stock as being slightly more volatile than the market. This is to be expected of a firm which operates in a highly technological and dynamic environment. We expect Intel to earn $2.5 per share in 2012 and $2.75 in 2013. Intel is growing its earnings by around 10% and its forward PE multiple is less than 10. We think this is an attractive investment opportunity. Microsoft (MSFT) has a similar valuation. Microsoft will probably make around $2.70 in 2012 and $3.10 in 2013. Microsoft’s 2013 PE multiple is also less than 10 despite its 10% EPS growth rate. Microsoft is also the third most popular stock among hedge funds (see the 10 most popular stocks among hedge funds). We think tech stocks are cheap in general and we especially like Intel and Microsoft because of their relatively higher dividend yields.