15 July 2009

INTC: 2009-2Q Gauges (Preliminary)

In a previous post, we examined Intel Corporation's (NASDAQ: INTC) Income Statement for the second quarter of fiscal 2009 and compared the figures on it to our "look-ahead" estimates.

This post provides the latest figures for the various financial metrics we use to analyze Intel's financial strength, performance and value.  It also reports Intel's scores on our Financial Gauges.

Some background information about Intel and the business environment in which it is currently operating can be found in the beginning of our look-ahead.

After digesting the data in the latest quarterly report, Intel's gauge scores are now:
  • Overall: 22 of 100 (down from 30)

If the European Commission had not fined Intel $1.447 billion, the Profitability gauge would have remained at 8 points, the Value gauge would only have slipped to 5 points, and the Overall gauge would be 27 points.

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

Cash Management Jun 2009 Mar 2009 Jun 2008 5-yr Avg
Current Ratio 2.6 2.9 2.5 2.5
LTD/Equity 3.0% 3.0% 4.7% 4.0%
Debt/CFO (years) (*)
0.2 0.1 0.2 0.2
Inventory/CGS (days) 69.6 71.2 74.6 74.3
Finished Goods/Inventory 43.2% 40.0% 40.7% 36.9%
Days of Sales Outstanding (days) 23.5 25.0 22.5 30.2
Working Capital/Invested Capital 39.8% 39.8% 38.6% 45.0%
Cash Conversion Cycle Time (days) 44.7 50.5 48.8 57.0
Gauge Score (0 to 25) 13 10 15 11
* Based on an estimate of Cash Flow in 2009-2Q.

Despite the weak economy, Intel's Balance Sheet remains strong and liquid.  Debt is insignificant, and working capital is high. 

The most substantial change to the Cash Management metrics in the June quarter is the reduction in the CCCT, which indicates more efficient use of cash. The lower ratio of Inventory-to-CGS is part of the efficiency improvement, and it is probably due to the more favorable sales environment.

The increase in the Finished Goods ratio is puzzling in this regard because it would normally decrease when sales are more rapid than management expected.  It would be interesting to determine if sales of one segment of the product line were especially weak.

Growth Jun 2009 Mar 2009 Jun 2008 5-yr Avg
Revenue growth -15.9% -10.5% 11.1% -1.5%
Revenue/Assets 66.3% 68.8% 77.8% 75.2%
Operating Profit growth -0.3% -0.9% 9.1% -1.6%
CFO growth (*)
-48.5% -31.6% 24.2% -10.5%
Net Income growth -65.1% -34.0% 24.3% -14.9%
Gauge Score (0 to 25) 0 0 18 9
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in
Operating Profit after Taxes over the last 16 quarters.
* Based on an estimate of Cash Flow in 2009-2Q.

While the Revenue decline wasn't as bad as forecast for the second quarter, this situation is not equivalent to Growth.  The Cash Flow rate, which is an estimate, and the Net Income growth rates were adversely affected by the $1.45 billion fine.

Profitability Jun 2009 Mar 2009 Jun 2008 5-yr Avg
Operating Expenses/Revenue 78.7% 77.2% 74.2% 75.9%
ROIC 15.9% 19.8% 23.2% 22.9%
Free Cash Flow/Invested Capital (*)
4.7% 11.2% 30.0% 7.8%
Accrual Ratio (*)
-1.3% -0.2% 0.6% 7.9%
Gauge Score (0 to 25) 6 8 21 12
* Based on an estimate of Cash Flow in 2009-2Q.

The increase in the Operating Expense ratio and the lower ROIC are not the result of special expenses.  These changes reflect the inefficiencies that result when Revenues are down.   We will need to take another look at the Cash Flow values when the 10-Q is published.

Value Jun 2009 Mar 2009 Jun 2008 5-yr Avg
P/E 37.4 18.9 17.5 19.4
P/E vs. S&P 500 P/E 1.7 1.0 1.0 1.2
PEG #N/A #N/A 1.9 1.6
Price/Revenue 2.8 2.4 3.1 3.5
Enterprise Value/Cash Flow (EV/CFO) (*)
11.7 8.3 8.4 26.4
Gauge Score (0 to 25) 3 7 10 10
* Based on an estimate of Cash Flow in 2009-2Q.

The EC fine took a big bite out of earnings, which makes the Intel's appear overvalued.

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

Overall Jun 2009 Mar 2009 Jun 2008 5-yr Avg
Gauge Score (0 to 100) 22 30 61 43

Intel staged a rebound in the second quarter that was more robust than expected.  When compared to the March period, Revenue was up 12 percent and the Gross Margin rose from 45 to 51 percent. 

However, the gauges were still under pressure.  This was due mostly to poor comparisons with last year's second quarter, but the $1.45 billion fine from the Europeans for antitrust violations trimmed 5 points from the Overall score.

Full disclosure: Long INTC at time of writing.

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