Because the earnings report did not include a complete Cash Flow statement, we had to make certain estimates to calculate our full set of gauge scores. We will adjust the results, as necessary, after Intel files a 10-K report with the SEC.
A Semiconductor Industry titan, Intel manufactures integrated circuits for computers, servers, hand-held devices, and communication products. Intel's most significant competitor is Advanced Micro Devices (NYSE: AMD), which has filed an antitrust complaint against its much larger rival. Intel is also facing other antitrust challenges.
In 2008, the price of Intel's common shares dropped 45 percent, from $26.66 to $14.66.
Intel initially provided guidance for the fourth quarter when it announced third-quarter results in October 2008. One month later, Intel cut its forecast, warning that business was substantially below the original expectations. Conditions continued to deteriorate, and Intel issued a second warning last week (see this ).
The GCFR Overall Gauge assessment of Intel increased to 62 of the 100 possible points in September. The rise was mostly due to a 12.8-percent decline in Intel's share price during the third quarter. (Our contrarian Value gauge, which is the largest contributor to the Overall score, moves in the opposite direction of the share price.) The evaluation of the quarter was explained fully in this analysis report.
With the actual fourth-quarter data and Cash Flow estimates, the gauge scores are now:
- Cash Management: 18 of 25 (up from 14 in September)
- Growth: 0 of 25 (down from 10)
- Profitability: 10 of 25 (down from 19)
- Value: 13 of 25 (down from 15)
- Overall: 47 of 100 (down from 62)
Before examining each gauge, we will compare the latest Income Statement to our previously posted, most recent, 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.
http://sheet.zoho.com/public/ncarvin/intc-income-statement?mode=html
The quarter's Revenue of $8.23 billion was slightly above the $8.2 billion value indicated in last week's earnings warning. Revenue was 23.2 percent less than in the December 2007 quarter. Revenue in all of 2008 was 2 percent below that in 2007.
The original guidance for Revenue in the fourth quarter was $10.1 billion to $10.9 billion. In November, this range was reduced to $8.7 billion and $9.3 billion.
Intel last week lowered expectations for the Gross Margin in the fourth quarter to "the bottom of the previous expectation of 55 percent, plus or minus a couple of points." We interpreted this to mean 53.0 percent, and the actual Gross Margin was 53.1 percent. The Cost of Goods Sold (CGS) was, therefore, 46.9 percent of Revenue. Intel explained that the margin was adversely impacted by "higher factory underutilization charges and higher inventory write-offs."
Research and Development (R&D) expenses at 16 percent of Revenue, and Sales, General, and Administrative (SG&A) expenses at 15.4 percent of Revenue, were both consistent with the company's latest guidance and our predictions.
Restructuring and asset impairment charges essentially matched Intel's guidance. The earnings report was silent on the cause for these charges, but they might have been due to the discontinuation of 200 mm NAND flash memory devices manufactured with Micron Technology (NYSE: MU).
Operating Income exceeded our prediction by 3.0 percent, but it was 50 percent less than in the December 2007 quarter.
Intel recorded an ugly $1.2 billion loss on equity investments. The loss reflected the much reduced market value of an investment in Clearwire Corp. (NASDAQ: CLWR).
Interest and other non-operating income was much less than in previous quarters. We look forward to seeing an explanation in the 10-K.
The Income Tax Rate of 36.6 percent was much higher than normal and well above the guidance.
As a result of the last couple of items, Net Income for the quarter fell short of our prediction by $12 million (4.9 percent). Net Income was 90 percent less than in the December 2007 quarter.
| Cash Management | December 2008 | 3 mos. ago | 12 mos. ago |
| Current Ratio | 2.5 | 2.1 | 2.8 |
| LTD/Equity | 4.8% | 4.9% | 4.6% |
| Debt/CFO | 0.2 yrs | 0.2 yrs | 0.2 yrs |
| Inventory/CGS | 77.5 days | 72.9 days | 76.1 days |
| Finished Goods/Inventory | 41.6% | 40.8% | 41.6% |
| Days of Sales Outstanding (DSO) | 20.8 days | 25.8 days | 25.2 days |
| Working Capital/Market Capitalization | 14.3% | 10.4% | 9.5% |
| Cash Conversion Cycle Time | 47.7 days | 47.4 days | 53.1 days |
| Gauge Score (0 to 25) | 18 | 14 | 15 |
Despite weak business conditions, Intel's Balance Sheet remains strong. The only area is concern is the higher Inventory level, which isn't surprising given that sales were so much less than originally expected. Debt is low, and working capital is high.
| Growth | December 2008 | 3 mos. ago | 12 mos. ago |
| Revenue growth | -2.0% | 7.4% | 8.3% |
| Revenue/Assets | 70.7% | 75.8% | 73.7% |
| CFO growth (*) | -21.0% | 8.2% | 18.7% |
| Net Income growth | -24.1% | 18.1% | 38.3% |
| Gauge Score (0 to 25) | 0 | 10 | 15 |
* Based on an estimate of Cash Flow in 2008-4Q.
Revenue, Cash Flow, and Net Income are all contracting.
| Profitability | December 2008 | 3 mos. ago | 12 mos. ago |
| Operating Expenses/Revenue | 76.2% | 73.9% | 78.6% |
| ROIC | 21.1% | 24.9% | 21.2% |
| FCF/Equity (*) | 11.7% | 20.9% | 19.2% |
| Accrual Ratio (*) | 1.9% | 0.6% | 7.7% |
| Gauge Score (0 to 25) | 10 | 19 | 14 |
Operating expenses increased substantially as a percentage of Revenue in the quarter, but they are still lower than they were one year ago. Although we don't have complete Cash Flow data, it is safe to say that Free Cash Flow dropped substantially.
| Value | December 2008 | 3 mos. ago | 12 mos. ago |
| P/E | 15.6 | 14.5 | 22.9 |
| P/E to S&P 500 average P/E | 116% | 81% | 129% |
| Price/Revenue | 2.2 | 2.7 | 4.2 |
| Enterprise Value/Cash Flow (EV/CFO) (*) | 7.3 | 7.4 | 11.6 |
| Gauge Score (0 to 25) | 13 | 15 | 0 |
The gauge, which takes a contrary view of share prices, had risen sharply in the first three quarters of the year. Although the share price continued to fall in the fourth quarter, the plunging earnings in the fourth quarter made the valuation seem less attractive even with the lower stock price.
Intel's valuation ratios can be compared with other companies in the Semiconductor industry.
| Overall | December 2008 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 47 | 62 | 34 |
The fourth quarter was brutal for the Intel in almost every respect. Worldwide economic slowness took a big bite out of the sales of products that include semiconductors. This performance was anticipated by the stock market which punished Intel shares long before sales fell precipitously.
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