Intel Corp – Are they worth your consideration?

Intel Corporation was incorporated in 1968 and is the largest manufacturer of semiconductor chips in the world.

A dividend challenger with 6 years of growing its dividend, Intel has paid a dividend every year since 1992.

Intel’s mains products are microprocessors and chipsets but they are transforming from a PC-centric company to a data-centric company, with solutions designed to help move and store the ever-increasing amounts of data.

Intel is increasingly investing in data-driven tech which includes artificial intelligence, the transformation of networks, IoT and autonomous driving.

For any Nerds out there have a look at the evolution of the chip below.

Operating Segments

PC – Centric Business

Intel’s PC-centric is currently their largest unit which focused on processors and platform products designed for use in laptops, desktops, and tablets. Intel has had a steady growth in this segment with a 3-year compound return of 5% from 2015 -2018. Computers will not be going out of fashion any time soon so this segment will be a steady cash flow machine over the coming years. However, it is a declining market and they are losing some of the market share to competitors such as AMD, so expect the growth to slow down over the next couple of years.

Data Centric Business

It is not easy for a large company to transition its core business as can be seen with IBM. However, Intel appears to be making a pretty good go at it. The Data-centric business is the fastest-growing segment with a 3-year compound return of 14%.

The Data centric business is made up if the following groups:

1. Data Center Group (DCG) which focuses on developing workload-optimized platforms for compute, storage, and network functions.
2. Internet of Things Group (IOTG) focuses on developing high-performance compute for targeted verticals and embedded markets.
3. Mobileye – Mobileye is the global leader in driving assistance and automation solutions.
4. Non-volatile Memory Solutions Group (NSG) is a technology leader in next-generation memory and storage products.
5. Programmable Solutions Group (PSG) delivers programmable semiconductors or a broad range of market segments, including communications, data center, industrial, and military.

The below screenshot will show you the revenue for each segment for Q2 2020

Company Growth

Over the last 10 years revenue has increased FROM $43,623 million to $71,965 million as of 2019. This gives a CAGR of 5.13%. However, Intel is a company in transition which can bring its own set of challenges. Recently Intel announced that there will be a delay in 7-nanometer technology for at least six months and possibly longer, which immediately affected their share price. This could hamper future revenue growth and allow competitors to gain further market share in the CPU world.

Looking over their past, it seems like this is not the first time that Intel has delayed its latest chip technology for example back in 2018, they delayed mass production of 10 nm CPUs by a year. In fact, since 2011, there have been 5 such delays with their CPUs. This has led to market share in the CCG to drop from 73% in 2019 to under 65% right now.

Giving the diversity of Intel’s business segments, I expect them to make up the loss of revenue with up and coming segments like autonomous driving. Q2 2020 showed disappoint results with mobileye but this was heavily impacted by the lack of car sales due to COVID 19. I believe the long term prospects for this segment is strong particularly with mobileye securing design wins from Ford for the new ADAS production programs.

Fiscal 2020 Q3 Earnings Results

Instead of reviewing Q2 earnings, I will leave this placeholder here as the Q3 earnings will be out next week (22nd Oct). I’l update this once the earnings are out.

Dividends

Intel has paid uninterrupted dividends for over 20 years. They are still only considered a dividend challenger because they have had a couple of occasions where they hold their dividend steady for 2 years.

The next dividend payment date is in December where Intel will pay $0.33 per share. Intel has also been buying back shares since 2005 but this has been suspended since March 4th, 2020 due to the COVID-19 pandemic.

Check out the below chart from IOCHARTS.IO

Payout Ratio

The Payout Ratio is a good indicator of the sustainability of dividends. I have discussed the different methods for calculating the Payout Ratio here.

It is nice to see that the dividend is covered by both earnings and cash flow. The earnings payout ratio is currently around 13.38% and the FCF payout ratio is slightly higher at 33%. Looking at the last 10 years Intel like to keep the FCF payout ratio under 50% so there is plenty of room for more dividend growth in the future

Dividend Growth

Companies that generate sustainable earnings growth often make the best dividend companies, as it is easier to lift the dividend when earnings are rising.

Part of my Investment thesis is to invest in companies that show a good history of increasing dividends but also show good potential to continue to raise them.

Over the last 15 years, Intel had an impressive DGR of 14.75% compared to the S&P500 DGR of 7.71%. however, as you can see from the chart below it is not consistent. I would not be surprised if they held their dividend stagnant next year. Although it is nice for the company to say they are prioritizing growing dividends to look after the shareholder.

Would I buy this company?

Please see my disclaimer before reading on. These are my thoughts and are not to be used as investment advice. I am simply outlining my thought process when deciding if I should buy a company or not. Please do your own due diligence and check all data for your self.

This will be broken into 6 different sections with the maximum points per section are outlined below.

Section	Max Points
Financial Strength & Future Proof	25
Management Quality	15
Dividend Quality	20
Valuation	20
Story of the Stock	15
Momentum (TA)	5
Total	100

A recommendation is than provided based on the over all score out of 100.

Financial Strength and Future Proof

Income statement

When starting to analyze a companies’ financial position, I start with the income statement. I generally look through 10 years of statements where I am interested in the average growth of Revenue, net Income, and Earnings per share. Basically, I m looking to see there is a demand for a companies products, they generate profit after costs and taxes and their earnings are growing.

Revenue has grown steadily over the last 5 and 10 year period with at over 5%. Earnings have also been impressive with double-digit growth over 5 years. Net Income has doubled over the last 3 years and was $21,048 million in 2019.

I also note the net profit margin and operating profit margin, over the last 10 years to ensure they are at least maintaining their margins.

Again Intel score strongly here, in 2019 the Operating margin was 31% which was higher than the 10 year average of 29%. The net margin was 29.25% which again is higher than the 10 year average of 22%.

While I’m on the income statement I like to compare profitability ratios against the industry from www.readyratios.com. Again Intel appears to be pretty strong in this department

Balance Sheet

The next step is to analyze the balance sheet. The first step is to check how much assets and liabilities a company has and to calculate the book value, or shareholder equity.

Some of the assets may be listed as “goodwill”. If goodwill and other intangible assets are excluded from total assets when calculating shareholder equity, then you get the tangible book value.

When a company acquires another company and pays a price that is higher than the tangible book value of that company, they’ll incur a loss on their balance sheet and income statement. To avoid this problem, the acquiring company can put the difference between the purchase price and tangible book value of the acquired company on their balance sheet as “goodwill”. When ever you see an increased amount of goodwill over a number of years you can assume the company can be buying other businesses. depending on the business they bought this can be seen as a good thing.

Below is the Goodwill on the balance sheet over the last 10 years. It is no surprise that this is increasing due to the acquisitions named in the management section below..

At the end of 2019, Intel had a D/E ratio of 0.76, which is higher than the industry average of 0.53. Interest coverage is over 50.2 which is far greater than the 3:1 ratio that I look for. The industry average is 0.66.

Morning star grades Intel as an Investment grade A+ level which means they are a Low credit risk

Cash Flow Statement

Operating cash flow shows how much cash a company received from operating, after expenses. For me it is good to compare this with the net Income. I am looking for the operating cash flow to be healthy and larger than net income.

Free cash flow, is the real cash profit and for me is one of the most important metrics. I like to see a company that has free cash flow equal to at least 65% of net income over the last 10 years. This ensures they have plenty of cash to keep paying us shareholders dividends. In 2019 Free cash flow was 80% of net income and a trend that was similar for the previous 10 years.

Cash flow has been strong and stable over the last 10 years and grown nearly 7% a year on average. Dividends are well covered by both earnings per share and free cash flow which leaves plenty of room to grow them over the next few years.

Intel scored a respectable 19 out of 25 in this section.

Management

In January 2019, Intel promoted Bob Swan to CEO. Swan’s previous experience includes CFO at eBay.In April, Intel appointed George S. Davis as CFO. Davis had been serving as Qualcomm’s CFO since 2013.

Given the financial backgrounds of both Swan and Davis, I would expect them to streamline their efforts into their core areas while reducing the massive capital expenditure bill.

Management has done a good job of maintaining a dominant position in CPU but there have been a few mistakes as they transition to a more data focus company.

1. Intel paid $1.4 billion for Infineon in 2011 to try to break into the smartphone processor world. This ended in 2016 and in 2019 Intel sold its 5G modem business to Apple.
2. Intel acquired antivirus maker McAfee for $6.7 billion in 2011. The aim was to add security features to its chips and hardware, which when integrated with the software will provide more effective security solutions. Intel was unsuccessful with this attempt, and spun off 51% of the business in 2016.
3. In 2015, Intel acquired programmable logic device maker Altera for $16.7 billion, mainly to serve large data center customers looking for customized server processors with FPGAs.
4. In 2017, Intel acquired Mobileye for $15.3 billion, in order to kick-start its prospects in advanced driver assistance systems and autonomous driving. No Doubt this was an expensive purchase but Mobileye is a high-growth business that already has design wins across major automakers.

Overall this section scored 11/15

Dividend Quality

At current prices, I have estimated that it will take roughly 18 years to reach a YoC of over 10%. The scoring metric that I use awards 5 points if it takes under 12 years to reach a YoC of 10% and 3 points in it takes under 15 years.

While there current yield is greater than the SP500 by 144%, I require at least 200% here to give full marks

The dividend growth rate has been stable with 5.59% DGI over the last 5 years and 8.4% over the last 10 years.

Overall this section earned 12 out of 20.

Valuation

PE ratio

Looking at the current TTM PE ratio, Intel would look overvalued at 10 times earnings. Historically o the average pe ratio has been 14 x earnings which would give a fair value of $65. This would make them undervalued from a PE point of view

DDM

Using my multistage discount model the current estimated price is $62.48. I like to use a 10% margin of error which would still make intel undervalued using the DDM model.

DCF

Using a discounted cash flow model with a discount rate of 9.5% the fair value for Intel was $67.64

Overall the company look undervalued by all 3 metrics and scored 18 of 20 in this section

Story of the Stock

In this section, I look at the market place in general, is it stable, can the company continue to grow? Do they Innovate and how efficient is there organisation. I also look at the overall share count, Are they reducing this over the last 5 years?

We have discussed above that Intel are a company in transition and are moving to a more data centric company.While this has some challenges, there is also huge potential for further growth. I am most excited about the long term prospects of Mobileye. They are losing market share in the PC centric business but PC chips are not going anywhere for another few years so this segment should provide a steady cash flow.

I like that the company had made shareholder returns a priority which includes dividends and share buybacks and over the last 10 years they have reduced the share count from 5,696 million to 4,473 million.

If Intel can return to 10 year average P/E ratio of 14.26 than we can expect a 16.5% total Annual Return over the next couple of years.

Overall, this company scored 12 out of 15 in this section

Tech Analysis

I call it tech analysis, but really I just check to see if there is a selling climax happening and if the stock if over bought of oversold. In this case there has been more selling than buying over the last 3 months and the RSI is 62 and rising from the selloff. The stock has rebounded around 15% from its last sell off back in july.

This section scored 1/5

Recommendation

My Scoring recommendations are as follows

Recommendation	Score
Strong Buy	90 – 100
Buy	71 – 90
Hold	51 – 70
Sell	31 – 50
Strong Sell	0 – 30

With a current score of 71, Intel gets a Buy recommendation. Transforming your business is no easy feat as IBM has shown but there are a lot of things to like about Intel. They have a strong balance sheet, Dividend looks safe and they look undervalued at current prices. The delay in the 7nm chip is a concern and there are talks that AMD is already working on their 5nm chip which could further hurt Intel market share in the PC-centric business.

Mobile devices have become a popular choice to perform computing tasks and access data via cloud infrastructures. This provides strong tailwinds for Intel’s server processor business. Altera acquisition will help Intel maintain its recent growth in this space.

I am most excited by Mobileye, which sells computer vision processors into production vehicles for basic functions such as advanced driver assistance systems. In 2019, Mobileye shipped 17.4 million EyeQ chips versus 2.7 million in 2014, which represents a 46% CAGR.

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