15 July 2008

INTC: Financial Analysis through June 2008

We have analyzed Intel's preliminary financial results for the second quarter, which ended on 28 June 2008.

Intel Corporation (INTC) manufactures vast quantities of semiconductor chips. These devices, which include microprocessors, memory devices, and other integrated circuits, are used in computers, communication products, and consumer electronics.

When we evaluated Intel Corp. after the first quarter of this year, our Overall Gauge of the company rose to 49 points, of the 100 possible points, from just 33 points the previous quarter. The increase was driven by a reawakening of the Value gauge, which jumped from zero to 8 of the 25 possible points. The sagging stock price led to the Value score improvement. The first-quarter results also lifted the Growth and Profitability gauges; both moved up to 15 of the 25 possible points.

Because the second quarter's preliminary results did not include a complete Cash Flow statement, we have 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. We calculated the following gauge scores with the available second-quarter data supplemented with Cash Flow estimates:

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

Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats and terminology. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($M)June 2008
June 2008
June 2007
Other income
Interest, etc.167150180
Pretax income231321871529
Income tax(712)(722)(251)
Net Income160114661278
Shares outstanding580059005917
1. Includes the NOR flash memory business subsequently transferred to Numonyx.

Revenue was near the top of the $9.0 to $9.6 billion range forecast by the company when it reported first-quarter results. We had assumed the $9.3 billion midpoint would be achieved. Instead of a predicted 7.1-percent increase over the Revenue value in the comparable year-earlier quarter, growth was a more robust 9.1 percent.

Intel had predicted it would achieve a Gross Margin in the second quarter of "56 percent plus or minus a couple of points." The actual Gross Margin was 55.4 percent, which translates into a Cost of Goods Sold (CGS) of 44.6 percent of Revenue. Intel attributed the lower-than-anticipated Gross Margin to "growth in demand for lower-priced notebook PCs[, which] resulted in a lower than expected microprocessor average selling price."

Research and Development (R&D) expenses were 15.5 percent of Revenue, exactly matching our 15.5 percent estimate. Similarly, Sales, General, and Administrative (SG&A) expenses were 15.1 percent of Revenue, also matching our forecast of 15.1 percent.

Restructuring and asset impairment charges were $150 million less than the company's $250 million estimate -- a rather substantial difference.

Although the additional Revenue helped, the smaller value for miscellaneous operating charges was the main reason Operating Income exceeded the forecast value by 6.8 percent.

Non-operating income and losses, in the aggregate, was only $17 million off of the estimated level.

The Income Tax Rate was 30.8 percent, less than the guidance of 33 percent. Intel stated that the lower figure was due to a tax settlement.

Net Income surpassed our prediction by a substantial 9.2 percent. On a per-share basis, the out-performance was an even healthier 12 percent because the company bought back more of its shares, $2.5 billion worth, than we expected.

Cash Management. This gauge didn't change from the 14-point score it registered in March.

3 mos.
12 mos.
Current Ratio2.52.53.0
LTD/Equity 4.7%4.9%4.7%
Debt/CFO 0.1 yrs0.2 yrs0.2 yrs
Inventory/CGS 74.6 days75.4 days84.1 days
Finished Goods/Inventory 40.7%41.7%35.9%
Days of Sales Outstanding (DSO)22.5 days25.7 days29.0 days
Working Capital/Market Capitalization 9.3%10.6%9.2%
Cash Conversion Cycle Time 48.8 days52.7 days66.3 days

The reduction in Inventory to under 75 days is welcome, as is the reduction in Days of Sales Outstanding. These efficiency improvements are reflected in the rather dramatic drop in the Cash Conversion Cycle Time.

Growth. This gauge increased from 15 points in March to 21 points now.

3 mos.
12 mos.
Revenue growth11.1%10.9%-3.1%
Revenue/Assets 76.2%73.3%71.5%
CFO growth (*)26.1%31.7%-6.6%
Net Income growth 24.3%27.4%-14.6%
Growth rates are trailing four quarters compared to four previous quarters.
* Based on an estimate of Cash Flow in 2008-2Q.

Revenue, Cash Flow, and Net Income are all growing at healthy rates.

Profitability. This gauge increased from 15 points in March to 20 points now.

3 mos.
12 mos.
Operating Expenses/Revenue 74.2%76.0%81.6%
ROIC 18.6%18.2%13.9%
FCF/Equity (*)23.3%21.5%15.3%
Accrual Ratio (*)-0.6%2.1%5.2%

* Based on an estimate of Cash Flow in 2008-2Q.

Operating expenses have come down substantially as a percentage of Revenue, and returns have gone up. The negative and declining Accrual Ratio signifies higher-quality earnings.

Value. Intel's stock price inched up over the course of the quarter from $21.18 to $21.48. The good operating performance, combined with the stagnant price per share, helped this gauge increase from 8 points in March to 9 points now.

3 mos.
12 mos.
P/E 17.518.424.6
P/E to S&P 500 average P/E 103%107%150%
Enterprise Value/Cash Flow (EV/CFO) (*)8.38.512.0
* Based on an estimate of Cash Flow in 2008-2Q.

Intel shares have become significantly less expensive by several the measures we consider most important.

The Overall Gauge score of 57 points is a very good result, under almost any circumstances, but especially when one considers that the score was only 20 points one year earlier.

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