Intel Realizing Silicon Dreams

5/31/2010


  Recent Price
$21
  Dividend
$0.63
  Yield

3.0%

  P/E Ratio
15
  Shares (millions)
5,681
  Long-Term Debt as % of Capital
5%
  52-Week Price Range
$24.37- - $15.00

Intel ($21; INTC) makes memory microchips, networking products, and microprocessors, most notably the Pentium series. Last year, Intel shipped more than 80% of the world’s microprocessors, the central processing units, or brains, of personal computers. On a smaller scale, Intel produces chipsets — the computer’s central nervous system, which sends data between the microprocessor and the mouse, keyboard, and DVD drive.

Despite its dominant market position, Intel trades at 15 times trailing earnings, versus the semiconductor industry’s average P/E ratio of 22 and the company’s five-year average P/E of 19. Moreover, Intel’s primary market, personal computers (PCs), should benefit from lean inventories and rising demand over the next year. Intel is a Buy and a Long-Term Buy.

Business breakdown

Last year, Intel derived 21% of its revenue from Hewlett-Packard ($46; HPQ) and 17% from Dell ($13; DELL). Intel’s PC client group generated 75% of its 2009 sales, primarily by producing microprocessors for notebooks, netbooks, and desktop PCs. It also builds motherboards for both desktop and wireless-connectivity products. The data-center group (18%) builds many of the same products, only for use with server computers. Intel also sells microprocessors and chipsets for communications and electronic equipment.

Global PC sales rose at least 20% in the March quarter from the year-earlier period, powered by a 45% gain in China. Intel foresees a meaningful pickup in sales of consumer PCs in the second half of the year, which coincides with the company’s traditional sales ramp. Moreover, management estimates businesses delayed purchasing 1 million servers last year. Intel is well-positioned to benefit from the rebound once businesses begin spending again.

The company expects sales and earnings to expand at low double-digit rates over the next few years, well above the annualized growth of 1% in sales and 4% in per-share profits over the last five years. Contributing factors include organic growth in the PC market; new products, including chips for smart phones and even televisions; and higher gross profit margins. Five-year growth drivers include consumer notebooks, tablet computers, smart phones, and corporate servers.

CEO Paul Otellini believes PC sales can grow at an annual rate of at least 15% over the next four years. That growth estimate includes tablet computers. While some are concerned that netbooks and tablets will siphon sales from notebooks and laptops, Intel suggests the devices play a complementary role and estimates that 88% of netbooks were purchased as a second computer.

Conclusion

Sales growth has recovered in the last two quarters, and operating profit margins have jumped. Intel also re-established free-cash-flow growth, boosting cash reserves by 54% in the past four quarters. The balance sheet boasts cash of $16.34 billion, or $2.88 per share, about eight times the value of long-term debt. An annual report for Intel Corp. is available at 2200 Mission College Blvd., P.O. Box 58119, Santa Clara, CA; (408) 765-8080; www.intel.com.

INTEL
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '10 $0.43 vs. $0.11 + 44% $22.75 -

$18.95

22 - 18
Dec '09 0.40 vs. 0.04 + 28% 21.27 - 18.31 32 - 27
Sep '09 0.33 vs. 0.35 - 8% 20.65 - 15.78 30 - 23
Jun '09 0.19 vs.

0.25

- 15% 16.74 - 14.62 21 - 19
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $35.13 $1.03 $0.56 $21.27
-
$12.05 21 - 12
2008 $37.59 $0.92 $0.55 26.34
-
12.06 29 - 13
2007 $38.33 $1.18 $0.45 27.99
-
18.75 24 - 16
2006 $35.38 $0.86 $0.41 26.63
-
16.75 31 - 19
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
97 97 80 82 93 65 52

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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