High-tech bellwether Intel Corporation (INTC) manufactures integrated circuits for computers, servers, handheld devices, and communication products. When we evaluated Intel three months ago, after results from 2007's fourth quarter, became available, we found that our Cash Management, Growth, and Profitability gauges of the company's financial performance had all increased. The rising scores lifted the Overall Gauge from very weak levels to 33 of 100 possible points. The rise was limited to this modest score principally because the double-weighted Value Gauge made no contribution at all.
In other words, we had evidence of improving financial and operating performance, we also had data indicating the good results were already reflected in Intel's closing share price of $26.66 last December.
After a steep fall early in the new year, Intel shares are now selling for only about $21. The lower price could provide a boost to the Value gauge.
Because the first-quarter preliminary results did not include a complete Cash Flow statement, we had to estimate Cash Flow from Operations and Cash Used for Investment, which are both meaningful parameters. When Intel submits the full 10-Q report for the quarter to the SEC, we will re-assess the results. Combining the first quarter data that is available and our Cash Flow estimates, we calculated the following gauge scores:
- Cash Management: 14 of 25 (15 after 4Q-2007)
- Growth: 15 of 25 (up from 14)
- Profitability: 15 of 25 (up from 13)
- Value: 8 of 25 (up from 0)
- Overall: 49 of 100 (up from 33)
Before we examine each gauge, let's compare the latest Income Statement to our previously posted expectations.
| ($M) | March 2008 (actual) | March 2008 (predicted) | March 2007 (actual) | |
| Revenue | 9673 | 9700 | 8852 | |
| Operating expenses | ||||
| CGS | (4466) | (4462) | (4420) | |
| R&D | (1467) | (1455) | (1400) | |
| SG&A | (1349) | (1397) | (1277) | |
| Other | (329) | (100) | (80) | |
| Operating Income | 2062 | 2286 | 1488 | |
| Other income | ||||
| Investments | (59) | 0 | 29 | |
| Interest, etc. | (168) | 175 | 169 | |
| Pretax income | 2171 | 2461 | 1873 | |
| Income tax | (728) | (763) | (237) | |
| Net Income | 1443 | 1698 | 1636 | |
| $0.25/sh | 0.28/sh | 0.28/sh | ||
| Shares outstanding | 5879 | 6000 | 5874 |
Revenue was slightly below the midpoint of the $9.4 and $10.0 billion range forecast by the company in January. We had assumed the $9.7 billion midpoint would be achieved. Instead of a predicted 9.6-percent increase over the Revenue value in the comparable year-earlier quarter, the increase was only 9.3 percent.
In January, Intel predicted that the first quarter 2008 Gross Margin would be 56 percent "plus or minus a couple of points." A few weeks ago, though, they reduced this forecast to 54 percent "plus or minus a point" due "to lower than expected prices for NAND flash memory chips." We now see that the actual Gross Margin was 53.8 percent, which translates into a Cost of Goods Sold (CGS) of 46.2 percent of Revenue.
Research and Development (R&D) expenses were 15.2 percent of Revenue, slightly above our 15 percent estimate. More positively, Sales, General, and Administrative (SG&A) expenses were only 13.9 percent of Revenue, nicely below our forecast of 14.4 percent.
Restructuring and asset impairment charges were a substantial $229 million above the company's $100 million estimate. Intel stated that $275 million of the $339 million charge was due to the transfer of assets to Numonyx, a new company that combines Intel's NOR flash memory business and STMicro's NAND business.
The charge related to Numonyx was the principal reason Operating Income was 9.8 percent below the forecast value.
We don't have any information explaining the $59 million loss on equity investments.
The Income Tax Rate was 33.5 percent, exceeding the guidance of 31 percent. Intel stated that the increase was "driven by a higher than expected proportion of profits being in higher-tax jurisdictions along with the tax effects of impairment charges related to the assets sold to Numonyx."
Net Income fell below our prediction by a substantial 15 percent. However, the spinoff of assets to a new company clearly was the key factor in the miss.
Cash Management. This gauge decreased from 15 points in December to 14 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 2.5 | 2.8 | 2.7 |
| LTD/Equity | 4.9% | 4.6% | 4.9% |
| Debt/CFO | 0.2 yrs | 0.2 yrs | 0.2 yrs |
| Inventory/CGS | 75.4 days | 76.1 days | 82.3 days |
| Finished Goods/Inventory | 41.7% | 41.6% | 34.6% |
| Days of Sales Outstanding (DSO) | 25.7 days | 25.2 days | 34.6 days |
| Working Capital/Market Capitalization | 10.6% | 9.5% | 9.7% |
| Cash Conversion Cycle Time | 52.7 days | 53.1 days | 70.4 days |
The Current Ratio was reduced because Intel spent $2.5 billion buying its own shares. It's still at a level that we consider to be a sign of financial strength. The share repurchase also reduced Stockholders' Equity. The reduction in Inventory to 75 days is welcome, but the higher proportion of Finished Goods Inventory could signify slower than expected sales. Other metrics indicate that Intel is managing cash more efficiently.
Growth. This gauge increased from 14 points in December to 15 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 10.9% | 8.3% | -7.9% |
| Revenue/Assets | 73.3% | 68.9% | 72.4% |
| CFO growth (*) | 37.8% | 18.7% | -23.4% |
| Net Income growth | 27.4% | 38.3% | -32.1% |
* Based on an estimate of Cash Flow in 2008-1Q.
Revenue, Cash Flow, and Net Income all appear to be growing at healthy rates.
Profitability. This gauge increased from 13 points in December to 15 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 76.0% | 77.2% | 82.2% |
| ROIC | 18.2% | 17.7% | 13.5% |
| FCF/Equity (*) | 23.0% | 17.8% | 12.6% |
| Accrual Ratio (*) | 3.9% | 7.7% | 2.3% |
* Based on an estimate of Cash Flow in 2008-1Q.
Operating expenses have come down, and returns have gone up. A negative Accrual Ratio would signify higher-quality earnings.
Value. Intel's stock price fell sharply over the course of the quarter from $26.66 to $21.18, which helped this gauge increase from 0 points in December to 8 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 18.4 | 22.9 | 21.1 |
| P/E to S&P 500 average P/E | 111% | 129% | 133% |
| Price/Revenue | 3.2 | 4.2 | 3.2 |
| Enterprise Value/Cash Flow (EV/CFO) (*) | 8.1 | 11.6 | 10.4 |
* Based on an estimate of Cash Flow in 2008-1Q.
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. The market shifted course early in 2008, and Intel shares became a lot less expensive.
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