Intel (INTC) - Negative 4Q Announcement Creates Buy Opportunity
In the last few decades, Intel has benefited to a large extent from the proliferation of PCs and has long held the lead in microprocessor technology and performance.
The runaway success that Intel has had in the processor market can be traced back to the firm's economic moat.
Its good performance can be seen in its research and development budget that has no match. In addition, the company has the financial resources to invest in cutting-edge semiconductor manufacturing technologies. All of this allows Intel to push processor performance and reduce manufacturing costs at a much faster pace than its competitor, Advanced Micro Devices (AMD).
Least but not last, Intel has recently acquired McAfee, the antivirus and security software maker for $7.7 billion. Although this purchase has been somewhat surprising for the experts in the sphere, Intel believes that this deal has been good because security issues are increasing in importance with the growth of Internet connected devices, including smartphones, tablets, etc. With this new security service, Intel expects to provide more effective security solutions.
Intel also has the opportunity to integrate McAfee's security software into its desktop and notebook chips. This will provide another opportunity for the firm to enhance its products to differentiate itself from AMD.
It appears Intel has aggressive plans to grow and widen its lead in the market. Its $15.20 billion of cash has enabled it to take advantage of market opportunities.
Intel has put into practice aggressive plans to introduce new chip architectures every two years. Actually, the firm recently launched its Sandy Bridge chips, combining both computer and graphics processors onto the same silicon.
The company is better positioned to take advantage and prosper in non-traditional markets as x86 hits power/performance metrics — especially servers and tablets and to a lesser degree smartphones. INTC can only modestly outgrow the market in its core PC business (66% of revenue), but INTC should significantly outgrow the traditional server market on a richer mix of multi-core, better ASPs, larger ISPs, and nontraditional markets in storage and networking. Specifically, I believe that INTC's server business (18% of revenue) could grow at a 10-12% CAGR and has potential earnings power of $1.50-$1.75 in two years time.
Another key point is when (not if) INTC will establish a larger presence in tablets. Analysts estimate tablet five-year CAGR of 76%.My bullish view on INTC's tablet prospects is based upon (1) a widening manufacturing lead relative to Moore's Law transitions, (2) the need for the non-AAPL tablet market to move towards standards and (3) success in this market is NOT margin dilutive — remember INTC is not leveraged to ASP/unit and product gross margin but rather revenue/wafer and incremental gross margin.
However, Intel may suffer certain risks too. The main disadvantage that the company may have is the maturity of the PC market. This is a marked obstacle to growth. Furthermore, there is a new company that is trying to spread, namely, ArvinMeritor Inc. (ARM). This is a company in charge of designing smartphones and tablets.
ARM has been highly successful in chips for mobile devices and tablets because of the low power consumption of its designs. ARM intends to move upstream with the blurry line between PCs and smartphones. Nonetheless, Intel's Atom processors are expected to become much more competitive in the next couple of years. This should allow Intel to achieve design wins in tablets and smartphones.
Results have been great in 2011. The firm has been able to make $10.9 billion in cash and short-term investments vis-à-vis its $7.1 billion in debt.
The third quarter has seen Intel growing strongly and exceeding investors’ expectations.
Intel hasrecord revenues of $14.3 billion, an increase of 29% year over year, with net income of $3.7 billion increasing 24% over the same period, thus doing away with forecasts.
Daniel Salmon of BMO Capital Markets stated at an interview: “Despite the fierce market competition that Intel may suffer in the next few years, last quarter results have shown that Intel is moving in an upward trend. Undoubtedly it is a good pick for investors.”
All areas of the business are growing strongly. The Intel Atom microprocessor section's revenue fell 32% year over year, but it will recover.
But recently INTC had a negative fourth-quarter pre-announcment.The cause not surprising (HDD supply issues), but the timing was. That is why the stock is off 9.7% since that announcement. The key concern is whether or not a supply issue in HDDs is masking larger demand issues due to macro weakness. INTC’s commentary around utilization plans remaining unchanged is consistent with a view that this is supply only; I think that the HDD supply issue [i]without[/] demand issues would drive a better-than-seasonal first quarter 2012.
Intel´s shares are trading at $23.75. EPS in the last 12 months have been of $2.31 per share placing its shares on a P/E ratio of 10.28.
Earnings in the region are expected to be of $2.56 in 2012, thus its forward price earnings ratio slips to 9.27. Those multiples are extremely cheap for this kind of quality-moat company. As we can see in the chart below, the shares appear undervalued considering the P/E, P/S and P/B multiples INTC traded in the past 10 years.
The company produces an operating margin of 32.77% and a ROE of 27%. This is really attractive for everyone.
Generally speaking, revenue is expected to grow 26%, including the acquisitions of McAfee and Infineon's wireless chip unit, both of which closed in the first quarter. Intel has been in an upward trend since 2010, after the slowdown in 2009 due to a fall in PC demand.
My fair value estimate per share is expected to reach $26.
McAfee and Infineon's wireless chip business will contribute about $3.6 billion in revenue.
In 2012, expectations forecast a cyclical downturn. This downturn may be driven by the processor market projections, as well as other segments, such as chipsets, motherboards and flash memory. Nevertheless, Intel will certainly achieve single digits over the long run.
The server processor segment will certainly be Intel's fastest-growing business. Cloud computing will require substantial server build-outs.
Intel has spread its chip performance. But, AMD is expected to be more competitive thanks to new products.
Despite AMD's competitive actions, Intel will keep its dominant position in the market. Profitability has improved partly due to cost cuts.
The operating margin is expected to move from 36% to 33% in the year to come.
Management & Stewardship
As every investor knows, a good performance is always accompanied by a good management strategy. The president and CEO, Paul Otellini, has been with Intel since 1974 and since 2002 he has been president and COO. Stacy Smith became CFO in 2007. Before becoming CFO he held various positions in the company. The former CFO Andy Bryant is now working as chief administrative officer. Finally, Jane Shaw serves as chairman.
It is very interesting to see that the chairman and CEO positions are clearly separated. This is of interest particularly to shareholders.