The metrics were calculated using data from Intel's current and historical financial statements, including those in the new 10-K for fiscal 2010.
When Intel reported its results for the fourth quarter of fiscal 2010, the company announced earnings of $3.388 billion ($0.59 per diluted share). Later, after a flaw was discovered in a new chipset, Intel added a $300+ million charge ($208 million after tax) to its Cost of Goods Sold. This change reduced fourth-quarter earnings to $3.180 billion ($0.56 per share).
A previous GCFR article examined in some detail Intel's Income Statement for the December quarter, using the originally reported data. The retroactive reinstatement of U.S. R&D tax credits helped boost earnings above our estimate.
Before getting into the details, we will take one step back to introduce the subject of today's analysis.
Intel is the most prominent manufacturer of integrated circuits for computers, servers, hand-held devices, and communication products. The company is included in the Dow Jones Industrial Average and the S&P 500. It has a market value of about $125 billion.
Fortune Magazine lists Intel as one of the companies most admired for innovation.
In
fiscal 2010, Intel's Net Income rose to $11.7 billion from $4.4 billion
the previous year. Revenue increased from $35.1 billion to $43.6
billion.
Intel's business is organized into nine product
groups. The two largest groups, by far, are PC Client and Data Center.
The PC Client Group sells microprocessors
and related products for desktop, notebook, and netbook computers. It
also markets wireless connectivity products. PC Client was responsible
for $31.6 billion of Revenue in 2010, 72.4 percent of Intel's total
Revenue.Fortune Magazine lists Intel as one of the companies most admired for innovation.
The Data Center Group sells microprocessors and related products for servers, workstations, and storage computing equipment. It also has products for wired network connectivity. The fast-growing Data Center Group had Revenue of $8.7 billion in 2010, 20 percent of the company's total sales.
The newest generation of Intel microprocessors, known as Sandy Bridge, includes a CPU and a Graphics Processing Unit. This design could, in theory, reduce the need in some PCs for the dedicated graphical chips built by AMD and NVIDIA (NASDAQ: NVDA).
On 31 January 2011, Intel announced that it had discovered a flaw in a chipset. The cost to the company in lost sales and repairs could reach $1 billion.
Intel's dominance in the market for personal computer CPUs does not extend to smartphones and tablet computers. These mobile-computing devices, including those sold by Apple (NASDAQ: AAPL), are most often powered by chips designed by ARM Holdings (NASDAQ: ARMH) and its many licensees, which include Samsung, NVIDIA, and Qualcomm (NASDAQ: QCOM). The ARM designs are valued for their low-power consumption.
Microsoft (NASDAQ: MSFT) has decided to make the next version of Windows compatible with ARM processors to facilitate the use of the company's operating system on greater numbers of tablets and smartphones. This decision should also make ARM chips more suitable for use in personal computers. NVIDIA has made known it would develop CPUs using ARM designs for a wide variety of other platforms.
Perhaps desiring an opportunity to participate in the demand for ARM technology, Intel agreed to purchase Infineon’s (ETR: IFXA) Wireless Solutions Business for about $1.4 billion in cash. This deal, announced on 30 August 2010, includes Infineon's ARM-based offerings.
Intel, in something of a surprise, announced in August 2010 a deal to acquire McAfee (NYSE:MFE), a maker of security software, for $7.7 billion. Intel believes that combining McAfee's security expertise with Intel's hardware designs will have long-term benefits. Others are skeptical about the advantages and the price.
Now we turn to the financial gauges. The latest quarterly results produced the following changes to the scores:
- Cash Management: 9 of 25 (down from 7 in September)
- Growth: 23 of 25 (down from 24)
- Profitability: 22 of 25 (unchanged)
- Value: 18 of 25 (down from 19)
- Overall: 72 of 100 (unchanged)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.
| Cash Management | 25 Dec 2010 | 25 Sep 2010 | 26 Dec 2009 | 5-yr Avg |
| Current Ratio | 3.4 | 3.3 | 2.8 | 2.6 |
| LTD to Equity | 4.2% | 4.3% | 4.9% | 4.7% |
| Debt/CFO (years) | 0.1 | 0.2 | 0.2 | 0.2 |
| Inventory/CGS (days) | 81.1 | 74.8 | 70.4 | 75.9 |
| Finished Goods/Inventory | 37.2% | 41.2% | 35.1% | 38.6% |
| Days of Sales Outstanding (days) | 21.2 | 20.2 | 20.9 | 26.3 |
| Working Capital/Revenue | 41.2% | 37.0% | 34.3% | 32.5% |
| Cash Conversion Cycle Time (days) | 55.0 | 49.9 | 43.9 | 54.3 |
| Gauge Score (0 to 25) | 9 | 7 | 17 | 12 |
The Cash Management gauge remains cautious because of the rising Inventory/CGS ratio, above-normal Working Capital, and the uptrend in the Cash Conversion Cycle Time.
The concern about expanding Inventory is eased by a relatively static Inventory/Revenue ratio and the decreasing proportion of Finished Goods in the Inventory. It's now clear that the earlier increase in the Finished Goods ratio was due to Intel gearing up for sales of new products.
| Growth | 25 Dec 2010 | 25 Sep 2010 | 26 Dec 2009 | 5-yr Avg |
| Revenue Growth | 24.2% | 30.4% | -6.5% | 4.6% |
| Revenue/Assets | 75.0% | 76.6% | 67.8% | 72.1% |
| Operating Profit Growth | 20.6% | 21.8% | 11.5% | 24.6% |
| CFO Growth | 49.4% | 40.4% | 2.2% | N/A |
| Net Income Growth | 162.4% | 355.2% | -17.4% | 11.5% |
| Gauge Score (0 to 25) | 23 | 24 | 4 | 9 |
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
The Growth gauge score remains outstanding. The single-point decline merely reflected some moderation from unsustainable growth rates.
The stellar Cash Flow growth rate continued to rise, helped by $5.5 billion in the fourth quarter of 2010.
The Net Income growth rate appears especially bright because of weakness during the early part of the year-earlier period.
| Profitability | 25 Dec 2010 | 25 Sep 2010 | 26 Dec 2009 | 5-yr Avg |
| Operating Expense/Revenue | 63.5% | 64.1% | 75.3% | 74.5% |
| ROIC | 38.2% | 38.9% | 22.5% | 24.5% |
| Free Cash Flow/Invested Capital | 38.5% | 35.2% | 22.6% | 18.3% |
| Accrual Ratio | 8.4% | 10.5% | 2.2% | 7.0% |
| Gauge Score (0 to 25) | 22 | 22 | 12 | 14 |
The Profitability gauge held on to its earlier gains, and it remains within 3 points of a top score.
The Return on Invested Capital is near a 10-year high, according to our records. The Free Cash Flow ratio is also close to a multi-year high
The relatively high Accrual Ratio has been keeping the Profitability gauge below a top 25-point grade; however, the Accrual Ratio started to decline in the last quarter. We generally consider Quality of Earnings to be better when the Accrual Ratio is both negative and getting lower. In this case, special charges in recent years have made the Accrual Ratio less reliable.
| Value | 25 Dec 2010 | 25 Sep 2010 | 26 Dec 2009 | 5-yr Avg |
| P/E | 10.4 | 10.5 | 26.3 | 20.0 |
| P/E vs. S&P 500 P/E | 0.7 | 0.7 | 1.3 | 1.1 |
| PEG | 0.5 | 0.5 | 2.3 | 1.0 |
| Price/Sales | 2.7 | 2.6 | 3.3 | 3.1 |
| Enterprise Value/Cash Flow (EV/CFO) | 5.9 | 6.3 | 9.2 | 6.6 |
| Gauge Score (0 to 25) | 18 | 19 | 0 | 8 |
| Share Price ($) | $20.84 | $19.42 | $20.33 | - |
The solid score is the result of a stable to share price, while revenue, earnings, and cash flow from operations have all increased substantially. When the quarter ended, the shares were selling at a significant discount to their historical multiples.
The Price-to-Sales ratio, which avoids complications such as special charges and variable tax rates, is very low.
| Overall | 25 Dec 2010 | 25 Sep 2010 | 26 Dec 2009 | 5-yr Avg |
| Gauge Score (0 to 100) | 72 | 72 | 30 | 43 |
Seventy-point Overall scores are hard to achieve and sustain. Intel's Growth, Profitability and Value gauges all have very good readings. The Cash Management gauge was negatively affected by Inventory data that doesn't, on second look, appear to be worrisome.
Full disclosure: Long INTC at time of writing.
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