01 November 2008

INTC: Financial Analysis through September 2008 (Updated)

Intel's announcement of its results for the third quarter of 2008, which ended on 27 September, did not include a complete Cash Flow statement.  When we analyzed the data and computed gauge scores, we had to estimate Cash Flow from Operations and Cash Used for Investment.

A Semiconductor Industry titan, Intel manufactures integrated circuits for computers, servers, hand-held devices, and communication products.

Intel Corporation (NASDAQ: INTC) has now submitted a 10-Q report that includes a current version of each financial statement with appropriate footnotes.  We updated our analysis to incorporate the latest information, and this post identifies the revisions.  The 10-Q did not change our examination of the third-quarter Income Statement.

As it turned out, our Cash Flow estimates were close enough to reality (which is not always the case) that the data in the 10-Q didn't change any gauge scores from the levels in the pre-10-Q analysis.  The full and up-to-date set of scores are listed here:

As explained below, replacing the 30 September share price with the 31 October share price would bring the Value gauge up to 19 points and the Overall gauge up to an excellent 71 points.

The following Cash Flow metrics might be of interest:

Cash Flow from Operations growth: up 8.2 percent in the last four quarters, when compared to the four previous quarters.

Free Cash Flow to Equity:  20.9 percent over the last four quarters.

Accrual Ratio: +0.6 percent.  Earnings quality improved substantially over the last year.

Enterprise Value to Cash Flow from Operations: 7.4, down from 11.9 in September 2007.  This signifies better value.

The GCFR standard practice is to compute the Value gauge metrics and scores using the share price at the end of the quarter.  On 30 September, the closing price of Intel shares was $18.73.  However, by the end of October, the share price was down to $16.03.

The following table shows how the big drop in the price per share affected the Value metrics:

October 2008
September 2008June 2008
September 2007
Share Price
P/E 12.4
P/E to S&P 500 average P/E 74%
Price/Revenue 2.3
Enterprise Value/Cash Flow (EV/CFO) (*)6.2
Gauge score (0 to 25)

There is much other interesting information in the 10-Q report.

This year, Intel implemented Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements."  This standard provides a framework for measuring the fair value of financial instruments and for disclosing the extent to which the value is determined by transactions in the marketplace (as compared to models and assumptions).

Of the $16.4 billion in financial assets for which Intel estimated fair value, the Level 1 approach (quoted prices in active markets for identical securities) was used for 13.3 percent.  The Level 2 approach was used for 74.3 percent, and the remainder were valued using the Level 3's "significant unobservable inputs."

In the the first-quarter of 2008, Intel and STMicroelectronics (NYSE: STM) formed Numonyx B.V., a new company.  Intel contributed NOR flash memory assets and STMicro added NAND resources.  During the third quarter, Numonyx's business prospects worsened.  This led Intel to record a $250 million "other-than-temporary" impairment charge on this investment.

Intel repurchased 93.4 million shares of common stock during the third quarter, at a cost of $2.1 billion.  The average cost per share was $22.484.

Intel had an agreement with Lehman Brothers (OTC: LEHMQ ) in which Intel advanced $1.0 billion to Lehman to purchase Intel shares.  Lehman provided an equivalent $1.0 billion of cash collateral.  Lehman didn't deliver the shares and Intel kept the collateral.

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