The market crash has ruthlessly slashed the price of Intel shares. Between 12 August and 15 October 2008, the closing price dropped from $24.52 to $14.99, a 39 percent decline.
When we evaluated Intel's second quarter, our Overall Gauge of the company rose to a promising 56 of 100 possible points, from 51 points the previous quarter. The Growth and Profitability gauges registered excellent scores of 18 and 19 points, respectively, of the 25 possible points per gauge. We would have liked to have seen a Value gauge score healthier than 9 points, but we remembered that this measure had bottomed out at zero only two quarters earlier.
Because the third-quarter preliminary results did not include a complete Cash Flow statement, we have had to estimate Cash Flow from Operations and Cash Used for Investment. We consider both of these measures to be important. When Intel submits the full 10-Q report for the quarter to the SEC, we will gain access to the Cash Flow data and reassess our results. We calculated the following gauge scores with the currently available third-quarter data supplemented with Cash Flow estimates:
- Cash Management: 14 of 25 (unchanged from June)
- Growth: 10 of 25 (down from 18)
- Profitability: 19 of 25 (unchanged)
- Value: 14 of 25 (up from 9)
- Overall: 62 of 100 (up from 56)
Before examining each gauge, we will compare the latest Income Statement to our previously posted expectations.
Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats and terminology. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($M) | September 2008 (actual) | September 2008 (predicted) | September 2007 (actual, 1) | |
| Revenue | 10,217 | 10,300 | 10,090 | |
| Operating expenses | ||||
| CGS | (4,198) | (4,326) | (4,919) | |
| R&D | (1,471) | (1,493) | (1,521) | |
| SG&A | (1,416) | (1,411) | (1,378) | |
| Other | (34) | (60) | (128) | |
| Operating Income | 3,098 | 3,009 | 2,144 | |
| Other income | ||||
| Investments | (396) | (180) | 148 | |
| Interest, etc. | 131 | 150 | 211 | |
| Pretax income | 2,833 | 2,979 | 2,503 | |
| Income tax | (819) | (983) | (712) | |
| Net Income | 2,014 | 1,996 | 1,791 | |
| $0.35/sh | $0.35/sh | $0.30/sh | ||
| Shares outstanding | 5,692 | 5,750 | 5,967 |
The quarter's Revenue was in the lower half of the $10.0 billion to $10.6 billion guidance range identified by Intel when it reported second-quarter results. We had assumed Revenue at the midpoint of the range, so it was a little weaker than we would have liked. Instead of a predicted 2.1-percent increase over the Revenue value in the comparable year-earlier quarter, growth was a tepid 1.3 percent. [Note that the September 2007 quarter included about $275 million of Revenue from assets subsequently transferred to Numonyx.]
Intel predicted it would achieve a Gross Margin in the third quarter of "58 percent plus or minus a couple of points." The actual Gross Margin was nicely higher at 58.9 percent, which translates into a Cost of Goods Sold (CGS) of 41.1 percent of Revenue. Intel explained that the the better-than-expected margin "was driven primarily by lower microprocessor unit costs and higher microprocessor revenue." The Gross Margin was only 51.2 percent of Revenue in the September 2007 quarter.
Research and Development (R&D) expenses were 14.4 percent of Revenue, almost equaling our 14.5 percent estimate. Similarly, Sales, General, and Administrative (SG&A) expenses were 13.9 percent of Revenue, close to our forecast of 13.7 percent.
Restructuring and asset impairment charges were $24 million less than the company's $60 million estimate.
The better-than-expected Gross Margin was the main reason Operating Income exceeded our prediction by 3.0 percent. Operating Income was 44 percent greater than in the September 2007 quarter.
The nearly $400 million loss was the worst performance we've seen for Intel's equity investments. A big contributor to the loss was a $250 million impairment charge on the company’s investment in Numonyx.
Interest income was $19 million less than we expected. On the positive side, the Income Tax Rate was at 28.9 percent, well below the 33-percent guidance. Intel stated that the effective tax rate was reduced by tax benefits associated with the Numonyx impairment charge.
Net Income for the quarter surpassed our prediction by a mere $18 million (0.9 percent). It was 12.5 percent greater than in the September 2007 quarter. On a per-share basis, the out-performance was an even healthier 17 percent because the company spent $2.1 billion to repurchase its shares.
Cash Management. This gauge didn't change from the 14 point score it registered in June.
| September 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 2.1 | 2.5 | 2.8 |
| LTD/Equity | 4.9% | 4.7% | 4.5% |
| Debt/CFO | 0.2 yrs | 0.2 yrs | 0.2 yrs |
| Inventory/CGS | 72.9 days | 74.6 days | 77.7 days |
| Finished Goods/Inventory | 40.8% | 40.7% | 38.2% |
| Days of Sales Outstanding (DSO) | 26.0 days | 22.5 days | 30.8 days |
| Working Capital/Market Capitalization | 10.4% | 9.3% | 8.7% |
| Cash Conversion Cycle Time | 47.6 days | 48.8 days | 60.1 days |
The reduction in the Current Ratio doesn't concern us because the level is still healthy, debt is low, and working capital is high. The smaller Inventory is a welcome development and could be evidence of stronger-than-expected sales. The dramatic drop in the Cash Conversion Cycle Time is a sign of improved operating efficiency.
Growth. This gauge decreased from 18 points in June to 10 points now.
| September 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 7.4% | 11.1% | 4.0% |
| Revenue/Assets | 75.8% | 77.8% | 74.7% |
| CFO growth (*) | 9.3% | 25.0% | 18.3% |
| Net Income growth | 18.1% | 24.3% | 3.5% |
* Based on an estimate of Cash Flow in 2008-3Q.
Revenue, Cash Flow, and Net Income are all growing at healthy rates, but the pace slowed in the recent quarter.
Profitability. This gauge didn't change from 19 points in June.
| September 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 72.2% | 74.2% | 80.2% |
| ROIC | 26.6% | 23.4% | 19.2% |
| FCF/Equity (*) | 21.2% | 23.2% | 19.1% |
| Accrual Ratio (*) | 0.5% | 0.5% | 6.8% |
Operating expenses have come down substantially as a percentage of Revenue, and the return on investment has improved. The big drop in the Accrual Ratio over the last year signifies higher-quality earnings.
Value. The gauge, which takes a contrary view of share prices, had risen to 9 points by the end of June. From the beginning of July to the end of September, Intel's stock price slipped from $21.48 to $18.73. Early October's market crash knocked the price down to $15. Using the 30 September price, per GCFR standard practice, the Value gauge score is 14 points. If we were to substitute the 15 October share price, the gauge would be 7 points higher.
| September 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 14.5 | 17.5 | 24.9 |
| P/E to S&P 500 average P/E | 86% | 96% | 145% |
| Price/Revenue | 2.7 | 3.1 | 4.1 |
| Enterprise Value/Cash Flow (EV/CFO) (*) | 7.4 | 8.4 | 11.9 |
Intel's valuation ratios can be compared with other companies in the Semiconductor industry. The shares have become less and less expensive by the measures we consider most important.
The Overall Gauge score of 62 is a very good result, under almost any circumstances, but especially when one considers that the score was only 27 points one year earlier. The company's excellent profitability is not reflected in the current price of the Intel's common shares, which seem substantially undervalued. The only logical explanation is that investors fear that worldwide economic slowness will take a big bite out of sales of products built around semiconductor products.
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