Sunday, April 14, 2013

Analysis of Intel

An American hardware producers "intel inside"

Company: Intel

Business: Mainly hardware with focus on processors with "intel inside" being a slogan that everyone knows what it means as well as the quality that stands behind that statement.

Active: Globally working with all technology producers. Intel themselves are active mainly in the US and EU.

P/E: 9.7

Intel I found via a new approach. I wanted to make an investment in the US due to that the dollar is cheap, the American companies are very healthy (P/E values often also reflects this even today), the US will at some point have increased inflation to reduce their debt which will be good for companies that are producing in the US.

To find Intel I started looking at companies in the US where the employees were happy and were giving a high grade to their management. Intel scored pretty high there even though some of the tech guys seemed to find it a boring tanker in comparison to a speedy catamaran that they wanted to work for. But I guess it is enough that you come from a start-up and join Intel or IBM or Microsoft and I am sure that you will find them all very boring and slow. I tend to love that though because that means income not only next month but also 10 years from now. Either way due to those employee evaluations I then started to dig deeper into the number of Intel and I became very much surprised. It was indeed an excellent company!

Intel has divided their business into five blocks. The biggest part is the PCCG, which is the processor part. The second one is the DCG, which is server, workstations and storage platforms. The third one is Other IA, which include tablet, smartphone etc. (currently ARM are beating them big time on that part of the market). The fourth one is SSG, mainly being McAfee that they bought and the final one is All other which has to do with non-volatile memory solutions.

It really has been tough for Intel that ARM arrived with their new technology of low power consumption processors. However... what I have seen so far ARM arrived with an excellent solution but since then their steps forward have been smaller. Intel has however jumped forward and are now very close to having a similar power consumption as the ARM devices.

An aspect that I like very much is that Intel has to only a very small extent outsourced production. Most of it is still back in the US of A and some of it is in Europe. So none of their knowledge went to Asia and today maybe Apple wish that they would not have done as they did in Asia with Samsung... Maybe the profit today for Apple would have been

I also like the amount of money that Intel spends on R&D. This company knows what must be done to stay on the top of the hill and they are prepared to pay the price for it! In real values just for your information Intel invests 10 billion USD in R&D. No joke! 10 billion! Qualcomm are pretty good with their 3.9 billion. STMicroelectronics invest 2.4 billion EUR. AMD invest 1.3 billion USD and ARM invest 0.2 billion Pound Sterling. Hmmm... which of these companies are most likely to be still standing 5 years from now? AMD is half dead as it is. STMicroelectronics are not doing very well. Qualcomm is doing good but high P/E so no buy for me. ARM is doing excellent but crazy high P/E today. In the future... Intel will still be there and probably Qualcomm also. The rest of them I just don´t know.

What I also like with Intel is that in 2010 they made a huge jump not only in revenue but especially in profit. The revenue has continued up in 2011/2012 and the profit stayed on the same level. Still.. that profit increase seem to have been completely neglected by Mr. Market. I mean.. who cares if you go from 5 billion profit to 10 billion profit in a year? Especially when new cool companies like ARM are making a yearly profit of 0.2 billion. By the way ARM has a P/E of around 80 today. If I would have had that stock I would sell it.

I bought Intel due to a new approach which was according to the happiness of the employees. Would be hard to sell it based on unhappy employees so I will go back to numbers from now on. Once the P/E reached over 23 I will start to look into selling it. That would today mean a share price of around 51 USD is a fair value of the stock.

The stock price is from closing day on 11/4-13.




The running P'/E is definitely below by favourite boarder of 10 and P/B with its 2 is fully acceptable. This gives according to the Graham formula a clear buy signal on Intel. I like that they have an E/S of 21% that I find really good even though the branch is better with around 30%. The growth that they have had in the last five years have been over 7% which motivates according to both Graham as well as Lynch a P/E value of at least 23 and with our current P/E of 10 we have a long journey ahead of us! If one look at how much they spend on R&D in comparison to their earnings it is really high and their extreme push started in 2011/2012 which is why they earnings have probably stabilised at around 10 billions. I assume this was based on them feeling forced to regain the market share lost to ARM. The dividends will be 4% which is very high for an American company on Dow Jones today and that they pay out 40% while still making that massive R&D investment for securing future earnings I find fully acceptable. Their quarter earnings seems to be very stable but I guess that is an effect when doing more Business to Business sales.

Conclusion: Intel was a very clear buy and I bought. I feel no fear for the future owning this excellent high tech company that are moving like an indestructible tanker also through the storms of smartphones and tablets and whatever else arrives in the future.

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