15 April 2009

INTC: Financial Analysis through March 2009

Intel (NASDAQ: INTC) earned $0.11 per share in the first quarter of fiscal 2009.  This post provides the initial GCFR analysis of the period, which ended on 28 March.

Because the press release did not include a complete Cash Flow statement, we had to estimate certain values to calculate a full set of gauge scores.  We will adjust the results, as necessary, after Intel files a 10-Q report with the SEC.

Intel Corporation is the foremost manufacturer of integrated circuits for computers, servers, hand-held devices, and communication products. 

The company's most direct competitor in the market for general-purpose microprocessors has long been the scrappy, smaller, and now financially stressed Advanced Micro Devices (NYSE: AMD).  However, Intel is now paying increased attention to specialty chipmakers.  Reports have circulated that NVIDIA (NASDAQ: NVDA), a powerhouse in Graphics Processing Units, might augment its product line with general-purpose "x86" microprocessors.  In a February 2009 countermove, Intel sued NVIDIA over the future applicability of an earlier license that "allowed nVidia to provide chipsets for Intel-based motherboards."

The weak global economy has hit the Semiconductor industry especially hard.  Financially strapped consumers and businesses are spending less on, for example, personal computers from Hewlett Packard (NYSE: HPQ) and Dell (NASDAQ: DELL).  These companies, which are Intel's two largest customers, are, therefore, buying fewer chips from Intel.  The Semiconductor Industry Association reported that sales declined year-over-year in 2008 for the first time since 2001.  Sales in the month of December 2008 were 22 percent less than those in December 2007. 

To add to the misery, Intel recorded a $1.2 billion loss on equity investments in the fourth quarter of 2008.  The loss reflected the much-diminished market value of an investment in Clearwire Corp. (NASDAQ: CLWR). 

Net Income in the December 2008 quarter dropped by 90 percent relative to the year-earlier period.  The GCFR Overall Gauge fell from to 67 to 52 of the 100 possible points, with the Growth and Profitability gauges (no surprise) weakening the most.  The evaluation was explained fully in this analysis report and this update.  

Now, with the newly reported first-quarter data and Cash Flow estimates, the gauge scores are:
  • Overall: 34 of 100 (down from 52)

Before examining 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.


Revenue fell by 26 percent in the March 2009 quarter, when compared to the year-earlier period.  We had estimated that Revenue would fall by 30 percent.  Looked at another way, Revenue in the quarter exceeded our estimate by 5.5 percent.

The Cost of Goods Sold (CGS) was 54.4 percent of Revenue in the quarter.  This translates into a Gross Margin of 45.6 percent.  We had expected the Gross Margin to drop all they way down to 42.5 percent.  Intel explained that the margin was lower than in the December 2008 quarter because of "higher factory underutilization charges and startup costs."

The Gross Margin has not been this low since the September 2001 quarter.

Research and Development (R&D) expenses were 18.4 percent of Revenue.  Our forecast was 18.5 percent of a lower Revenue figure.

Sales, General, and Administrative (SG&A) expenses were 16.8 percent of Revenue.  We were looking for 18.5 percent for this item.

Restructuring and asset impairment charges were less than half Intel's guidance, which was the basis for our estimate.

Operating Income sank by 67.5 percent, but it was better than the 90 percent decline we expected.  More pessimistic outcomes were not realized because Revenue and Gross Margin were slightly better than the anticipated, if still rather dismal.

Intel recorded a $113 million loss on equity investments.  We had assumed the loss would be twice as great.

Interest income and other non-operating income were a little less than our $100 million estimate.

The Income Tax Rate was a mere 0.8 percent, compared to the 27 percent indicated in the company's guidance.  Various tax matters from previous years were settled during the recent quarter.

Net Income for the quarter was 55 percent less than in the March 2008 quarter.  But it bested our prediction by a factor of ten!

Now for the gauges:

Cash ManagementMarch 20093 months prior12 months prior
Current Ratio2.92.52.5
LTD/Equity 4.7%4.8%4.9%
Debt/CFO 0.2 yrs0.2 yrs0.2 yrs
Inventory/CGS 71.3 days77.5 days75.4 days
Finished Goods/Inventory 40.0%41.6%41.7%
Days of Sales Outstanding (DSO)25.0 days20.8 days25.7 days
Working Capital/Invested Capital39.0%41.2%46.0%
Cash Conversion Cycle Time 50.5 days47.7 days52.7 days
Gauge Score (0 to 25)

Despite weak business conditions, Intel's Balance Sheet remains strong.  Debt is low, and working capital is high.  The Cash Management score slipped a little because of the higher DSO and CCCT, relative to the December 2008 quarter.  The lower Inventory ratios are very encouraging, as they suggest sales were better than management expected.  

GrowthMarch 20093 months prior12 months prior
Revenue growth-10.5%-2.0%10.9%
Revenue/Assets 68.9%70.7%76.7%
CFO growth (*)-18.4%-13.5%31.7%
Net Income growth -33.7%-24.1%27.4%
Gauge Score (0 to 25)0
Growth rates are trailing four quarters compared to four previous quarters.
* Based on an estimate of Cash Flow in 2009-1Q.

Revenue, Cash Flow, and Net Income have all contracted significantly.

ProfitabilityMarch 20093 months prior12 months prior
Operating Expenses/Revenue 77.1%74.3%76.1%
ROIC 19.3%22.8%23.0%
FCF/Invested Capital (*)16.6%19.6%30.0%
Accrual Ratio (*)0.2%0.5%2.1%
Gauge Score (0 to 25)9
* Based on an estimate of Cash Flow in 2009-1Q.

Obviously, efficiency and, therefore, Profitability suffers when sales slow dramatically.  However, the figures above are still pretty reasonable.

ValueMarch 20093 months prior12 months prior
P/E 18.815.618.4
P/E to S&P 500 average P/E 103%85%107%
Enterprise Value/Cash Flow (EV/CFO) (*)
Gauge Score (0 to 25)9
* Based on an estimate of Cash Flow in 2009-1Q.

The gauge, which takes a contrary view of share prices, rose in the middle of 2008 when the share price fell, but before economic weakness reached the high-tech sector.  Now, lower earnings, Revenue, and Cash Flow are taking a bite out of the Valuation measures.

Intel's valuation ratios can be compared with other companies in the Semiconductor industry.

OverallMarch 20093 months prior12 months prior
Gauge Score (0 to 100)34

Intel's first quarter of 2009 was very weak, and all of our gauges fell in response.  Worldwide economic slowness took a big bite out of the sales of computers and other semiconductor-based products.  However, some more pessimistic expectations for the quarter (some of which were fed by the company's earlier guidance) were not realized.  This could be seen as encouraging, but we suggest caution until evidence of Growth is detected.

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