In a previous article, we examined Intel Corporation's (NASDAQ: INTC) Income Statement for the third quarter of 2009 and compared the figures on each line to our "look-ahead" estimates. Intel earned $0.33 per share in the quarter, down from $0.35 last year. Using the financial statements in Intel's earnings announcement, we have now updated a set of Cash Management, Growth, Profitability and Value metrics. This post reports on the results and the associated financial gauge scores.
Some background information about Intel and the business environment in which it is currently operating can be found in the beginning of the look-ahead.
In summary, Intel's latest quarterly results has produced the following changes to the gauge scores: - Cash Management: 13 of 25 (unchanged from June)
- Growth: 1 of 25 (up from 0)
- Profitability: 11 of 25 (up from 10)
- Value: 0 of 25 (down from 3)
- Overall: 24 of 100 (down from 27)
Because the press release did not include a complete Cash Flow statement, we had to estimate certain values. We will adjust the gauge scores after Intel files a 10-Q report with the SEC.
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.
| Cash Management | Sep 2009 | Jun 2009 | Sep 2008 | 5-yr Avg |
| Current Ratio | 2.5 | 2.6 | 2.1 | 2.5 |
| LTD/Equity | 5.6% | 3.0% | 4.9% | 4.1% |
| Debt/CFO (years) (*) | 0.2 | 0.1 | 0.2 | 0.2 |
| Inventory/CGS (days) | 68.5 | 69.6 | 72.9 | 74.1 |
| Finished Goods/Inventory | 41.0% | 43.2% | 40.8% | 37.4% |
| Days of Sales Outstanding (days) | 26.5 | 23.5 | 25.8 | 29.7 |
| Working Capital/Invested Capital | 40.6% | 39.8% | 39.1% | 43.4% |
| Cash Conversion Cycle Time (days) | 40.5 | 44.7 | 47.4 | 55.9 |
| Gauge Score (0 to 25) | 13 | 13 | 13 | 11 |
The Great Recession has not had an appreciable negative effect on Intel's Balance Sheet, which remains strong and liquid. Although the company has more debt outstanding, the amount is by no means worrisome, and Working Capital is high.
The much lower CCCT signifies that Intel is using cash more efficiently. The improvement can also be seen in the Inventory-to-CGS reduction; inventory is turning over quicker in the more favorable sales environment. The rise in the Days of Sales Outstanding is a counter-example, but the increase appears anomalous.
The lower Finished Goods ratio relative to the second quarter is consistent with the view that sales were more robust in the recent period than management expected, which we consider to be a good omen. However, the ratio is still higher than its long-term average.
| Growth | Sep 2009 | Jun 2009 | Sep 2008 | 5-yr Avg |
| Revenue growth | -18.2% | -15.9% | 7.4% | -3.1% |
| Revenue/Assets | 63.2% | 66.3% | 75.8% | 74.0% |
| Operating Profit growth | 7.5% | 4.8% | 9.7% | -3.8% |
| CFO growth (*) | -26.0% | -29.4% | 8.2% | -2.2% |
| Net Income growth | -68.3% | -65.1% | 18.1% | -14.2% |
| Gauge Score (0 to 25) | 1 | 0 | 10 | 8 |
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
* Based on an estimate of Cash Flow in the latest quarter.
Although investors cheered quarterly results that exceeded expectations, the sentiment-free Growth gauge continues to react disapprovingly to steep reductions in trailing-year Revenue, Cash Flow from Operations, and Net Income. Special charges have exacerbated the Cash Flow and Net Income rates of decline; however, ignoring one-time events would not turn the declines into rises.
Comparisons with the past should become much more favorable after the fourth quarter of 2009 and the first quarter of 2010, if these two quarters unfold as presently expected.
| Profitability | Sep 2009 | Jun 2009 | Sep 2008 | 5-yr Avg |
| Operating Expenses/Revenue | 79.6% | 78.7% | 72.2% | 75.9% |
| ROIC | 15.6% | 15.9% | 26.2% | 23.3% |
| Free Cash Flow/Invested Capital (*) | 15.6% | 13.6% | 28.4% | 10.3% |
| Accrual Ratio (*) | -5.1% | -4.1% | 0.6% | 6.9% |
| Gauge Score (0 to 25) | 11 | 10 | 22 | 12 |
The increase in the Operating Expense ratio and the lower ROIC are consequences of the operating inefficiencies that resulted earlier this year when Revenue fell sharply. When the 10-Q is published, we will need to take another look at the profitability metrics that are related to Cash Flow.
| Value | Sep 2009 | Jun 2009 | Sep 2008 | 5-yr Avg |
| P/E | 47.4 | 37.4 | 14.5 | 20.5 |
| P/E vs. S&P 500 P/E | 1.7 | 1.6 | 0.8 | 1.2 |
| PEG | 6.3 | 7.7 | 1.5 | 2.3 |
| Price/Revenue | 3.4 | 2.8 | 2.7 | 3.4 |
| Enterprise Value/Cash Flow (EV/CFO) (*) | 10.3 | 8.5 | 7.4 | 19.1 |
| Gauge Score (0 to 25) | 0 | 3 | 15 | 9 |
Reported earnings in the last four quarters have fallen steeply enough, when combined with a recovering share price, to lift the price-to-earnings metrics well above common overvaluation thresholds. Investors, reasonably or not, are counting on profits to be much higher in the future.
The decline in earnings was exacerbated by the $1.5 billion antitrust fine in the second quarter of 2009 and the $1 billion write down in the fourth quarter of 2008 of Intel's investment in Clearwire Corp. (NASDAQ: CLWR).
Intel's share price rose from as low as $12 earlier this year to about $20 at the end of the third quarter.
| Overall | Sep 2009 | Jun 2009 | Sep 2008 | 5-yr Avg |
| Gauge Score (0 to 100) | 24 | 27 | 66 | 41 |
The rebound that began for Intel in the second quarter continued into the third. Sequential Revenue rose 17 percent after a 12-percent rise from the first to the second quarter. Although seasonal factors may have helped, they don't fully explain the increases.
The Gross Margin also improved from 45.3 percent in the first quarter, to 50.8 percent in the second, to 57.6 percent in the third reporting period of 2009.
So, why did the Overall Gauge score drop? The poor operating results at the end of 2008 and the beginning of 2009, exaggerated by two big special charges, make the most recent four quarters look awful when compared to the four previous quarters. If the economy doesn't falter again, this situation will soon reverse and the weakest quarters will slip to the trailing year.
Full disclosure: Long INTC at time of writing.
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