06 May 2007

INTC: Financial Analysis through March 2007

Intel (INTC), the semiconductor manufacturer, filed a 10-Q with the SEC for the quarter ending on 31 March 2007. We updated our analysis to address certain details (e.g., cash flow from operations) in this formal submission that were not available in the original press release. Our results, adjusted to account for the new information, are reported in this post.

Intel was the worst performer in the Dow Jones Industrial Average in 2006, when its stock price dropped about 20 percent. Improved performance in 2007 might be due favorable reviews given to Intel's newest products and predictions that Intel will regain market share from steadfast competitor Advanced Micro Devices (AMD).

When we analyzed Intel after the results from December 2006 became available, the Overall score was a weak 16 points. Of the four individual gauges that fed into this Overall result, Cash Management was the strongest at 12 points. Growth was weakest at 0 points, but Value wasn't much better at 2 points.

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

Cash Management. This gauge didn't change from December to March. The Current Ratio surged to 2.7, primarily because reduced taxes-payable lowered current liabilities. Long-Term Debt/Equity remained an insignificant 5 percent. The debt ratio was 6 percent one year ago. Intel's inventory reached alarming levels during parts of 2006, with Inventory/Cost of Goods Sold eclipsing 100 days (compared to the five-year median Inventory level of 70 days). In the most recent quarter, Inventory/Cost of Goods Sold edged down to 91 days from December's 92 days. The percentage of Inventory that is product ready for sale is 35 percent; the Finished Goods ratio was 39 percent in December. Taken together, the two inventory ratios hint more at stabilization than improved sales. Accounts Receivable/Revenues were 29 days. This is a week less than the historic value for the company, and it might indicate the company is doing a better job getting its customers to pay their bills.

Growth. This gauge is stuck at zero because growth is non-existent in the parameters we track. Revenue declined 8 percent year over year. Despite the first quarter's Net Income jump because a tax reversal reduced the income tax rate, Net Income still dropped a substantial 32 percent on a year-over-year basis. CFO dropped 23 percent. Revenue/Assets is 72 percent; it was 81 percent a year ago, and it indicates that the company is becoming less efficient at generating sales.

Profitability. This gauge also didn't change from December. ROIC declined to 13 percent from 23 percent a year ago. FCF/Equity also dropped to 13 percent from, in this case, 21 percent. Operating Expenses/Revenue moved up in the last year from 72 percent to 82 percent. The change was primarily due to a decline in Gross Margin of 8 percent. (Intel indicated that a shift to a more advanced manufacturing technology lowered manufacturing costs but this isn't apparent in the gross margin.) The Accrual Ratio, which we like to be both negative and declining, held steady at +1 percent.

Value. This gauge, based on the stock price of $19.13 at the quarter's end on 31 March, is a weak 3 points, compared to 2 and a strong 19 points, three and twelve months ago, respectively. The P/E at the end of the quarter was 21. The average P/E for the industry is a more expensive 26. To remove the effect of overall market changes on the P/E, we note that the company's current P/E is at a 33 percent premium to the average P/E, using core-operating earnings, for stocks in the S&P 500. Companies tend to trade at a premium when their growth rates are greater than average, particularly when the growth rates seem more likely to be sustained. The PEG ratio is N/A because Net Income is declining. The Price/Revenue ratio, which isn't affected by the one-time factors that cause wide swings in earnings, has held around to 3.2. The average Price/Sales for the industry is 4.5.

Now at disappointing 17 out of 100 possible points, the Overall gauge has been at weak levels for the last three quarters. If there had been an aggregate increase in demand for Intel's products, either because of an expanding market or an improved competitive position, we would have expected stronger revenue numbers and a more robust gross margin. Intel said the average selling prices "held up" during the quarter, which doesn't say much good about the revenue figure. Operating income bettered our expectations as result of lower SG&A expenses. We want to know if this reduction is the result of more efficient operations, which would be recurring, or is the result of a one-time event. Net income far exceeded all predictions, but we clearly see that this was due to a lower effective income tax rate. The resolution of a dispute with the IRS allowed $300 million of previously accrued taxes to be reversed.

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