INTC: Financial Analysis through December 2007

We analyzed Intel's (INTC) preliminary financial results for the quarter that ended on 29 December 2007. Because the results did not include a complete Cash Flow statement, we had to estimate a key parameter, Net Cash Flow from Operations, from other data. When Intel submits the full 10-K report for the year to the SEC, we will find re-assess the results.

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

Intel's shares recovered nicely in 2007, rising 30 percent from $20.45 to $26.66. The gain was helped by favorable reviews given to Intel's newest products and market share recaptured from steadfast competitor Advanced Micro Devices (AMD). However, the new year has not been kind to Intel shares, and the price has dropped all the way to $21.77 before bouncing back a little. The losses have been attributed to the slowing economy, an anti-trust investigation, and analyst downgrades.

When we evaluated Intel after the third quarter, we noted higher Revenue, Cash Flow from Operations, and Net Income. These improvements pushed the Overall Gauge up from a weak 20 points to a more moderate score of 30. Of the four individual gauges, Cash Management was the strongest at 14 points. Unfortunately, the double-weighted Value Gauge made no contribution whatsoever to the score. [The recent dip in the stock price could have a positive effect on the Value gauge.]

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

• Cash Management: 13 of 25
• Growth: 11 of 25
• Profitability: 12 of 25
• Value: 0 of 25 (see discussion below)

• Overall: 29 of 100

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

($M)		Dec 2007 (actual)	Dec 2007 (predicted)	Dec 2006 (actual)
Revenue		10712	10800	9694
Operating expenses
	CGS	(4486)	(4644)	(4884)
	R&D	(1481)	(1620)	(1426)
	SG&A	(1462)	(1512)	(1434)
	Other	(236)	(130)	(462)
Operating Income		3047	2894	1488
Other income
	Investments	(19)	0	7
	Interest, etc.	233	150	632
Pretax income		3261	3044	2127
Income tax		(990)	(883)	(626)
Net Income		2271	2161	1501
		0.38/sh	0.37/sh	0.26/sh

Revenue was near the low end of the $10.5 to $11.1 billion range forecast by the company in October. We had assumed the midpoint of the range would be achieved. Therefore, instead of a predicted 11.4 percent increase over the comparable value in the year-earlier quarter, the increase was only 10.5 percent.

A better story can be told with Operating Expenses. Intel estimated that Cost of Goods Sold (CGS) would be 43 percent of Revenue, and the actual value was 41.9 percent. Research and Development (R&D) expenses were 13.8 percent of Revenue, nicely below our 15 percent estimate. Similarly, Sales, General, and Administrative (SG&A) expenses were 13.6 percent of Revenue, a bit better than our forecast of 14 percent.

The lower-than-expected costs more than made up for the Revenue shortfall. As a result, Operating Income was 5.3 percent above the forecast value.

Non-operating income was $64 million greater than expected. However, the Income Tax Rate was 30.4 percent, exceeding the predicted 29 percent. Net Income exceeded our prediction by a healthy 5.1 percent.

It's strange that the stock market reacted so negatively to Intel's results. We believe the company largely met or surpassed guidance for the quarter. If lower expenses weren't the consequence of one-term gimmicks, future quarters will benefit.


Cash Management. This gauge decreased from 14 points in September to 13 points now.

The measures that helped the gauge were:

• Current Ratio =2.8, still strong
• LTD/Equity = 4.6 percent, insignificant and down from 5.0 percent in December 2006
  
• Days of Sales Outstanding (DSO) = 25.2 days, much less than the 34.2-day level one year earlier (no sign the company boosted sales with loose credit terms)
• Cash Conversion Cycle Time = 53.1 days, down substantially from 68.5 days, for this measure of efficiency
• Debt/CFO = 0.2 years, unchanged from December 2006
• Working Capital/Market Capitalization = 9.5 percent, up from 8.1 percent.

The measures that hurt the gauge were:

• Finished Goods/Inventory = 41.6 percent, up from 38.5 percent last year; did sales grow slower than the company had hoped?
• Inventory/CGS = 76.1 days, down from September's 77.7 days and 79.1 days in December 2006; still high, though, compared to historic levels.

Growth. This gauge increased from 8 points in September to 11 points now.

The measures that helped the gauge were:

• Net Income growth = 38.3 percent year-over-year; up from -42 percent
• Revenue growth = 8.3 percent year-over-year, a reversal from -8.9 percent
• CFO growth = 8.3 percent (estimated) year-over-year, a major turn-around from last year's -28 percent

The measures that hurt the gauge were:

• Revenue/Assets = 68.9 percent, down from 73.2 percent

Profitability. This gauge decreased from 13 points in September to 12 points now.

The measures that helped the gauge were:

• ROIC = 17.7 percent, up from 13.9 percent in a year
• FCF/Equity = 15.2 percent (estimated), up from 13.2 percent
• Operating Expenses/Revenue = 77.2 percent, down from 82.3 percent

The big factor in the decrease in operating expenses were cuts in R&D and SG&A and a percentage of Revenue.

The measures that hurt the gauge were:

• Accrual Ratio = +0.9 percent (est.), up from +0.4 percent

Value. Intel's stock price rose over the course of the quarter from $25.86 to $26.86. The Value gauge, based on the latter price, didn't get out of its zero-point rut.

• Enterprise Value/Cash Flow is 12.7, up from 10.4 in December 2006
• P/E = 22.9, a little below from 23.6
  
• P/E to S&P 500 average P/E = 31 percent premium, compared to a 36 percent 5-year median premium
  
• Price/Revenue ratio = 4.2, compared to a 4.0 5-year median.

The average P/E for the Semiconductor industry has dropped substantially to 22.6. The average Price/Sales for the Semiconductor industry is 5.8.


We had noted after recent quarters that Intel's stock price was increasing at a pace faster than the laudable improvements in operating performance. Our Value gauge for Intel had been stuck at embarrassingly low levels for more than a year, and we fretted that the nice gains the company was racking up in the stock market were not fully justified.

Now, however, the share price has given up the bulk of 2007's gains.

Given the reaction tonight to the December results, it is likely that the shares will open below $20 tomorrow morning. Patient investors might consider this to be an attractive, if admittedly contrarian, purchase opportunity. A $20 share price would cause the Value gauge to increase from 0 points to 9 points (out of 25), and the Overall gauge would inflate from 29 to 47 points (out of 100). The latter score, while a little too low to be a clear "buy" signal, is close to those levels that often anticipate stock price gains 12 months in the future. Keep in mind that we haven't yet assessed a full Cash Flow statement and our concerns about Inventory levels.