INTC: Financial Analysis through June 2007 (updated)

Intel's (INTC) preliminary financial results, reported in the form of press release, for the second quarter included only limited Cash Flow information. In our evaluation, we had to estimate Net Cash from Operations (CFO) from Net Income and other data.

The company subsequently submitted a Form 10-Q to the SEC with more complete financial statements. The 10-Q included the Cash Flow data missing in the original release.

We had estimated CFO at $2.728 billion for the quarter, and the correct figure was $2.417 billion. When we updated our analysis to use the lower CFO, the Profitability and Overall gauge scores were trimmed by one point each.

For completeness, we're providing the entire, updated analysis report.


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 first quarter, the Overall score was a dismal 18 points, indicating we saw no premonitions of the subsequent turnaround. Of the four individual gauges that fed into this composite result, Cash Management was the strongest at 7 points. Growth was weakest at zero points. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]

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

• Cash Management: 10 of 25
• Growth: 3 of 25
• Profitability: 8 of 25
• Value: 1 of 25
  

• Overall: 20 of 100
  

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

($M)		2Q-2007 (actual)	2Q-2007 (predicted)	2Q-2006 (actual)
Revenue		8680	8500	8009
Op expenses
	CGS	(4605)	(4250)	(3838)
	R&D	(1353)	(1360)	(1496)
	SG&A	(1284)	(1360)	(1593)
	Other	(88)	(84)	(10)
Operating Income		1350	1446	1072
Other income
	Investments	(1)	20	37
	Interest, etc.	180	207	144
Pretax income		1529	1672	1253
Income tax		(251)	(518)	(368)
Net Income		1278	1154	885
		0.22/sh	0.20/sh	0.15/sh

Revenue was 2 percent were higher than we expected, and 8 percent higher than the June 2007 quarter. We thought the Cost of Goods Sold (CGS) would be 50 percent of Revenue, and the actual value was 53 percent. In other words, the Gross Margin was 3 percent less than expected, mostly likely due to competitive pressures keeping prices in check. Research and Development (R&D) expenses were 15.6 percent of Revenue, a shade less than our 16 percent estimate. Sales, General, and Administrative (SG&A) expenses were 14.8 percent of Revenue, more than a point better than our forecast.

The higher CGS outweighed the better-than-expected Revenue, and the good control over R&D and SG&A expenses, resulting in lower-than-forecast Operating Income.

Non-operating income was $48 million less than expected. However, the Income Tax Rate was only 16.4 percent. Intel had predicted 31 percent. They now say that second quarter results benefited by $0.03/share for tax items, and they expect a tax rate going forward of 29 percent.

The low tax rate was the only reason that Net Income beat our prediction.


Cash Management. This gauge increased from 7 points in March to 10 points.

The measures that helped the gauge were:

• LTD/Equity = 5.0%, insignificant
  
• Current Ratio =3.0, returned to strength after a short weak spell
• Days of Sales Outstanding (DSO) = 29 days, less than the 32.6-day level one year earlier
• Working Capital/Market Capitalization = 9.2 percent, up from 7.3 percent
• Debt/CFO = .2 years, unchanged
  

The measures that hurt the gauge were:

• Inventory/CGS = 84.1 days, up from 81.9 days, and highest level since 1995
• Finished Goods/Inventory = 36 percent, up point from last quarter and last year
• Cash Conversion Cycle Time = 66.3 days, down from 67.5 days
  

Taken together, the two inventory ratios are worrisome.


Growth. This gauge increased from 0 points in March to 3 points.

• Revenue growth = -3 percent, down from +1 percent
• Revenue/Assets = 72 percent, down from 81 percent (efficiency suffering)
• Net Income growth = -15 percent, awful but better than recent quarters, driven by tax rate
• CFO growth = -7 percent, not as bad as last year's from -16 percent in a year
  

Profitability. This gauge increased from 5 points in March to 8 points now.

The measures that helped the gauge were:

• Accrual Ratio = -0.7 percent, down from +2.4 percent
  

The decreasing Accrual Ratio tells us that more of the company's Net Income is due to cash flow, and, therefore, less is due to changes in non-operational balance sheet accruals. This needs to be confirmed.

The measures that hurt the gauge were:

• ROIC = 14 percent, down from 19 percent
• FCF/Equity = 15.3 percent, down from 16.0 percent
• Operating Expenses/Revenue = 82 percent, up from 75 percent (ouch)
  

The big factor in the increase in operating expenses was the decrease in Gross Margin.


Value. Intel's stock price rose over the course of the quarter from $19.13 to $23.74. The Value gauge, based on the latter price, dropped to a weak 1 point, compared to 4 and 15 points three and twelve months ago, respectively.

There was no good news in the measures for this gauge.

• Enterprise Value/CFO is 12.0, up from 9.1 in June 2006
• P/E = 24.6, up from 16.7 hard to grow the multiple with so little growth
  
• P/E to S&P 500 average P/E = 48 percent premium, about double the average
  
• Price/Revenue ratio = 3.9, about the same as its long-term average.

The average P/E for the Semiconductor industry is a more expensive 28. The average Price/Sales for the Semiconductor industry is 5.2.


Now at a disappointing 20 out of 100 possible points, the Overall gauge stirred ever so slightly from last quarter.