INTC: Financial Analysis through September 2007

We analyzed Intel's (INTC) preliminary financial results for the quarter that ended on 29 September 2007. Because the results did not include a complete Cash Flow statement, we had to estimate a key parameter, Net Cash from Operations (CFO), from other data. We will have to wait for Intel to submit a complete 10-Q report to the SEC to obtain the missing data and re-assess the results.

Intel (INTC) manufactures integrated circuits for computers, servers, handheld devices, and communication products.

After a year in which Intel was the worst performer in the Dow Jones Industrial Average, the stock price started a significant recovery in April 2007. Outpacing the broader market, investors decided that rosier times were ahead for Intel. Favorable reviews given to Intel's newest products led to predictions that Intel will regain market share from steadfast competitor Advanced Micro Devices (AMD).

When we analyzed Intel after the second quarter, the Overall score was a disappointing 20 points, suggesting the stock rally might run out of steam. [In reality, Intel shares were up another 9 percent in the third quarter; we would note that our scores correlate better with price changes 12 months in the future.] Of the four individual gauges that fed into this composite 20-point result, Cash Management was the strongest at 10 points. Value was weakest at 1 point.

Now, with the available data from the September 2007 quarter, our gauges display the following scores:

• Cash Management: 14 of 25
• Growth: 7 of 25
• Profitability: 11 of 25
• Value: 0 of 25
  

• Overall: 27 of 100
  

Before we examine each gauge, let's compare the latest Income Statement to our expectations.

($M)		Sept 2007 (actual)	Sept 2007 (predicted)	Sept 2006 (actual)
Revenue		10090	9300	8739
Op expenses
	CGS	(4806)	(4465)	(4445)
	R&D	(1526)	(1395)	(1389)
	SG&A	(1383)	(1395)	(1425)
	Other	(128)	(150)	(106)
Operating Income		2247	1895	1374
Other income
	Investments	148	0	168
	Interest, etc.	211	320	272
Pretax income		2606	2215	1814
Income tax		(746)	(643)	(513)
Net Income		1860	1572	1301
		0.31/sh	0.27/sh	0.22/sh

Revenue was a substantial 8.5 percent greater than the estimated value, which was the midpoint of the range forecast by the company in July. Instead of a predicted 6.4 percent increase, Revenue was 15.5 percent greater than in the year-earlier quarter.

The company estimated that Cost of Goods Sold (CGS) would be 48 percent of Revenue, and the actual value was 47.6 percent. Research and Development (R&D) expenses were 15.1 percent of Revenue, essentially identical to our 15 percent estimate. Sales, General, and Administrative (SG&A) expenses were 13.7 percent of Revenue, quite a bit better than our forecast of 15 percent.

The net effect of the higher Revenue and lower SG&A expenses was Operating Income 18.6 percent above the forecast value.

Non-operating income was $39 million greater than expected. The Income Tax Rate was 28.6 percent, a little below the predicted 29 percent. Net Income exceeded our prediction by a healthy 18.3 percent.


Cash Management. This gauge increased from 10 points in June to 14 points now.

The measures that helped the gauge were:

• Current Ratio =2.8, remaining strong
• LTD/Equity = 4.5%, insignificant and down from 5.9 percent in Sept 2006
  
• Cash Conversion Cycle Time = 60.3 days, down substantially from 72.6 days, for this measure of efficiency
• Debt/CFO = 0.2 years, unchanged
• Days of Sales Outstanding (DSO) = 30.8 days, less than the 36-day level one year earlier
• Working Capital/Market Capitalization = 8.8 percent, up from 7.0 percent

The measures that hurt the gauge were:

• Inventory/CGS = 78.2 days, down from June's 84.1 days, but still high compared to historic levels
• Finished Goods/Inventory = 38.2 percent, up from 37.5 percent last year

Taken together, the two inventory ratios are worrisome.


Growth. This gauge increased from 3 points in June to 7 points.

The measures that helped the gauge were:

• Revenue growth = 4.0 percent yr-yr, tepid but a reversal from -6.1 percent
• Net Income growth = 4.7 percent yr-yr; first positive value since Dec 2005
• CFO growth = 9.7 percent yr-yr, a major turn-around from last year's -33 percent
  

The measure that hurt the gauge were:

• Revenue/Assets = 70.5 percent, down from 76.6 percent
  

Profitability. This gauge increased from 8 points in June to 11 points now.

The measures that helped the gauge were:

• FCF/Equity = 15.3 percent, up from 11.8 percent
• Accrual Ratio = 0 percent, down from +4 percent
• ROIC = 15.6 percent, down from 16.6 percent
  

The measure that hurt the gauge were:

• Operating Expenses/Revenue = 79.9 percent, up from 78.7 percent
  

The big factor in the increase in operating expenses was the decrease in Gross Margin, which was only partially offset by reductions in other costs.


Value. Intel's stock price rose over the course of the quarter from $23.74 to $25.86. The Value gauge, based on the latter price, is now at 0 points. Why?

• Enterprise Value/CFO is 12.9, up from 11.2 in Sept 2006
• P/E = 24.6, up from 20.0 (even though net income grew less than 5 percent over this period)
  
• P/E to S&P 500 average P/E = 52 percent premium, compared to a 34 percent 5-year median premium
  
• Price/Revenue ratio = 4.1, about the same as its long-term average.

The average P/E for the Semiconductor industry is a more expensive 28.5. The average Price/Sales for the Semiconductor industry is 5.3.


A very good operating quarter pushed the Overall gauge up from 20 to 27 points. It needs to continue, or the stock price needs to fall, for the Value gauge to contribute to the score.