It is a summer of discontent at Intel Corp (INTC, Financial).
And the effects show in this one-year price chart:
In June came news that Apple (AAPL, Financial) planned to stop using Intel chips in its Macs.
In July, Intel had to report that its new 7nm chips would be delayed until at least 2022, and that it might have to turn to a third-party manufacturer. And this wasn't the first time it had missed a deadline for a new product: The 10nm chips went through similar delays.
As a result, the share price tumbled down again, just after recovering from the market-wide February-March slump.
Making things worse for Intel is the fact that its two biggest rivals, Nvidia (NVDA, Financial) and Advanced Micro Devices (AMD, Financial), haven't been standing still. They have been gaining ground both technologically and with investors.
Many observers have noted that Nvidia's market cap surged past that of Intel thanks to Mr. Market's favor shifting from Intel (now $206 billion) to Nvidia (now just under $300 billion). AMD's capitalization also hit records by breaking the $100 billion mark, but has since receded slightly.
Despite the bad news, Intel remains optimistic, especially after delivering a strong second-quarter earnings report. CEO Bob Swan explained, "It was an excellent quarter, well above our expectations on the continued strong demand for computing performance to support cloud-delivered services, a work- and learn-at-home environment, and the build-out of 5G networks."
To assess the advisability of investing in the company, we will analyze its fundamentals, dividends and guru interest.
Financial strength
A good score for financial strength suggests that debt is not much of a problem for Intel, despite all the red in the table. As this chart confirms, it has been growing its debt:
While leverage has increased, the company is generating more than enough cash from operations to cover the interest expense; almost 50 times as much as it needs.
Both the Piotroski F-Score and the Altman Z-score are solid, indicating the company is doing reasonably well on metrics beyond debt.
And a ROIC vs WACC ratio that is heavily skewed toward return on invested capital means the company has allocated that capital very well. Since the weighted average cost of capital is 3.95%, it is generating slightly more than $5 for every $1 in costs.
Profitability
Since there is increased competition from Nvidia and AMD, we might expect Intel's margins to have eroded, yet there is no sign of that so far.
As this chart of the operating and net margins shows, they are not as high as they were a decade ago, but nevertheless, they're still strong:
Similarly, Intel's return on equity and return on assets are both very strong and would certainly be the envy of many other S&P 500 CEOs.
Take notice, too, of the growth rates at the bottom of this table: Revenue grew just under 10%, but profitability in the form of Ebitda and earnings per share before non-recurring items are more than 20% and 30% respectively. It's true that revenue and Ebitda are not growing as fast they did, based on the orange bars, but those rates are slightly better than those of Intel's competitors and peers.
Valuation
With a sea of green in this table, it's not surprising the company is highly rated for value.
The price-earnings ratio at 8.89 is lower than it has been at any time in the past decade, and that would concern us if the other metrics were down as much:
Dividing the price-earnings ratio by the five-year Ebitda growth rate gives us the PEG ratio, and it, too, is favorable for buyers. At 0.75, it indicates Intel stock is undervalued because 1.00 represents fair value.
The third valuation measure we check is the discounted cash flow, and it is at a level that should make a value investor's heart beat faster:
This DCF valuation is based on four-star predictability, so we can have relatively high degree of confidence in it.
Dividends and share buybacks
The dividend yield is above the 1.88 average of the S&P 500 companies, and has ranged between 2% and 3% for the past three years:
Although the share price is a major determinant of the yield, the board of directors has done its part by regularly increasing the amount of the dividend:
The dividend payout ratio is relatively low at 24%, indicating the company is still pumping more than three-quarters of its free cash flow into growth. That should mean more revenue and profit in coming years, with subsequently bigger dividend payments and more share repurchases.
The dividend growth rate is a solid 6.6%, which is well above the rate of inflation, and helps push up the five-year yield on cost to almost 4%. The latter suggests that if investors buy and hold the stock for five years, and management continues to increase dividend payments at the same rate as the last five years, the investors will average 3.79% per year on dividends alone.
A slightly higher forward dividend yield alerts us to a recent increase in the dividend payment. In February of this year, Intel increased the quarterly dividend from 31.5 cents to 33 cents.
Last on this table is the three-year share buyback ratio at 3.6. That means the company has been buying back more shares than it has issued:
Over the past 10 years, the company has reduced its share count by 21.5%, and subsequently pushed up the earnings per share proportionately.
Gurus
Intel is popular among the gurus followed by GuruFocus. At the end of the second quarter, 21 of them held positions.
Chief among them was Ken Fisher (Trades, Portfolio) of Fisher Asset Management with 28,665,401 shares, representing a 0.67% stake in the company and 1.68% of the firm's assets. During the quarter ending June 30, he added 3.11% worth of shares.
PRIMECAP Management (Trades, Portfolio) was the second-largest holder with 24,643,461 shares. It reduced its position by 2.79% in the quarter. Chris Davis (Trades, Portfolio), of Davis Selected Advisors, third-place position was well back at 8,469,465 shares. He increased his holding by 0.82%.
Conclusion
Despite all the bad news this summer, Intel had, and likely will continue to have, strong fundamentals and an above-average dividend yield. It no longer dominates its industry as it once did, but there is still a lot for investors to like about it.
Primarily, it continues to be a profit workhorse, churning out earnings and passing along some of them to shareholders while continuing to invest heavily in growth. Management obviously has done a good job. And among the shareholders who like this situation are almost two dozen gurus.
For income, value and growth investors, the low price will be attractive for different reasons, but each may add Intel to their shortlist of prospective investments.
Disclosure: I do not own shares in any companies named in this article.
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