16 January 2007

INTC: Analysis through Dec 2006

On Christmas Day, we studied Intel's financial results through September 30, hoping unsuccessfully as it turned out, to find some reason to believe the stock price might bounce back from its dismal, worst-in-the-Dow performance in 2006.

Today, Intel reported preliminary results for the 4th quarter of 2006. While some of the talking heads on CNBC and Bloomberg claimed otherwise, we saw little in these results to foretell an Intel stock price recovery. Note that the preliminary results are incomplete; for example, they included only a few elements needed to construct a Cash Flow Statement. Our analysis will remain incomplete until Intel submits, in late February or early March, a comprehensive year-end 10-K report to the SEC.

First, the good news. Progress was made on Cash Management. The Current Ratio is back above a healthy 2.0, and Long Term Debt to Equity is a minuscule 5 percent. Accounts Receivable are down to 28 days of Revenue, which we believe to be the lowest level ever for this parameter. The Inventory level is 92 days (measured by Cost of Goods Sold), down from recent, vertigo-inducing levels above 100 days, but Inventory is still way above historic norms. More worrisome, Finished Goods are up to 39 percent of Inventory, which suggests that the company is still having significant problems matching production to demand. Given the limited life-cycle of semiconductor products, we worry that the further price discounts (compressing the already shrinking Gross Margin) are in the offing.

Growth continues to be non-existent. Revenue is down 9 percent year over year. Net Income is down a whopping 42 percent. We're not sure about Cash Flow from Operations, but our back-of-the-envelope estimate has CFO matching the off-the-table fall in Net Income. Revenue/Assets is down to 73 percent, continuing a multi-quarter drop in efficiency.

Profitability? The Return on Invested Capital is 15 percent, down from 2005's value of 27 percent. The weakening of the Gross Margin contributed to the soaring Operating Expenses to Revenue, which is now up to 82 percent. We're not sure about Free Cash Flow/Equity, but we suspect it is less than half of what it was one year ago. We'll defer consideration of the Accrual Ratio until complete financial results are available.

The Valuation numbers are too depressing to review them all. We'll simply say that a company with decreasing Net Income somehow manages to maintain a Price/Earnings ratio better than the S&P 500.

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