Detailed investment analysis of Intel Corporation. Includes analysis, recommendation and conclusion. Created April 2010.

1. 0-457200 <br /> <br />Investment Analysis<br />Section 3<br />Austin Trent- Company and Industry<br />Teancum Light- Company and Industry<br />Spencer Barlow- Economy<br />Conclusion<br />The following report examines the corporate strategy and position of Intel Corporation. After careful study and analysis of the information we researched, we have compiled the following report, which discusses the different aspects of Intel, as well as the competitive nature of the industry and economic environment. We have given a buy rating to Intel. There are both risks and advantages to investing in the tech industry, which will be discussed more thoroughly throughout the paper. A comprehensive analysis of the company, industry, and economic environment will further support our proposal. Ultimately, we support a recommendation to buy Intel stock at its current price of $21.86. We have established a target price of $25 for year-end 2010. Our analysis relies on assumptions and calculations that are described throughout the report and are supported by accompanying exhibits. <br />Company Description<br />Intel Corporation makes microprocessors, chipsets, flash memory, wireless cards, and networked storage products for desktop PCs, notebook computers, servers, workstations, and other consumer products. The company sells to OEMS and distributors worldwide. The company was founded in 1968 and employs over 80,000 people. Intel’s headquarters are located in Santa Clara, CA.<br />Products<br />The recent release of the i7-based computer boards has been a huge success. The Intel i7-based boards have been designed to accommodate military, industrial, and telecom applications. Advantech Co. Ltd. is in Irvine, California and has created the Intel Core i7 processor, ranging from computer-on-modules and single-board computers to industrial motherboards for tasking and digital media solutions in military, factory automation, telecommunication, medical, and casino gaming applications. Advantech is also releasing four more industrial motherboard embedded computer products based on Intel’s Core i7 processor; the Mini-ITX motherboard AIMB-280, MicorATX motherboard AIMB-580, ATX motherboard AIMB-780, and the PICMG 1.3 SBC PCE-5125. We expect these releases to dominate the high end market for the next year. By providing embedded software support for these boards consisting of Windows 7, XPe, and Linux, Advantech will continue to maintain a loyal customer base for Intel.<br />Another big success for Intel has been the microprocessor market. Intel was responsible for 80.8% of the microprocessors shipped in 2008. The only significant competitor, AMD, only has 17.8% of the microprocessor market share. <br />Microprocessor Market Share 2008<br />AMD could take some market share this year, but we do not expect AMD’s Magny-Cours to threaten Intel’s performance crown. AMD will, however, have an opportunity to pick up market share in the lower-ASP and mainstream markets. <br />They should be able to do this with a great price schedule as well as excellent system power consumption.<br />Structure<br />Although Intel’s competitors face volatility due to their cyclical nature of sales, Intel is able to absorb revenue fluctuations because of its large size and corporate structure. We will now analyze the strategic position of Intel by observing different financial ratios, including: profitability, leverage, efficiency, liquidity, the DuPont framework, PE ratio, and others relevant to Intel’s corporate structure. <br />DuPont Framework<br />With an analysis of the DuPont Framework we can pinpoint why Intel’s ROE dropped from 23.29% in 2005 to 10.48%. All three of the components of the DuPont Framework dropped; however, the drop in profitability made the largest impact on ROE. Profitability dropped from 23.29% in 2005 to 10.48% in 2009. This reduction in profitability was due to increased non-recurring expenses, not a decrease in sales. If profitability had remained constant from 2005 to 2009 ROE would have been 18.8%.<br />Liquidity<br />Intel’s conservative capital structure has provided the company the liquidity and flexibility it needs to be the leader in its competitive industry. Intel is more liquid than the industry average, and only a fraction of its long term debt will mature within 5 years. As of September 2009 Intel had total LT debt of 2.2 B while only 176 M or 8% is due in 5 years.<br />Efficiency<br />Intel’s efficiency as described by turnover ratios and collection period is better than the industry average. There is no significant difference between Intel and the competitor average when it comes to inventory turnover, asset turnover, days to sell inventory, and operating cycle. However, Intel exceeds competition in average collection period and receivables turnover. Intel’s average collection period in 2009 was 58% (29 days) less than then industry average. Intel’s receivables turnover in 2009 was 2.15 times larger than the industry average. Intel is more efficient than the industry because it is able to collect cash faster.<br />Profitability<br />When the Duo Core Intel Processors entered the market prior to 2004, Intel dominated market share. With few competitors, Intel was able to make sales at a premium. Over time, multi-processor competition entered the market forcing Intel to decrease its price in order to remain competitive. AMD announced its duo core processors in 2005, marking the beginning stages of a price war. Intel has been a worthy competitor. Looking at profitability, Intel is leading the industry. Operating margin after depreciation is almost 8 times greater than the industry average. Because of Intel’s size, they are able to invest in very large projects requiring huge capital expenditures. They also invest heavily into research and development. Looking at the tax codes, this works to Intel’s advantage. Intel can take the majority of its R&D costs and capitalize them as long as they meet certain requirements called for by the FASB. This tax incentive allows Intel to create a tax shield of future earnings, as amortization is deducted over future years and future earnings. In a sense, Intel is in a position to make a lot of money with a relatively small tax expense.<br />Another point to consider is the recent increase in operating margin. There was a drop from 2005-2006, which we generally attributed to AMD’s release of the duo core processor. Part of this is also due to the market penetration of other companies as well. The industry is highly competitive, creating a difficulty for Intel and other tech companies. Intel’s greatest assets lie within its management, engineers, and programmers, whose talents are responsible for Intel’s financial success. However, some of these employees start their own development companies that end up competing with Intel. With over 43,000 valuable employees, there is a reason Intel is ranked in the in Fortune 500’s top 100 companies to work for. They cannot afford to lose their greatest assets.<br />One might also wonder why the industry average is depreciating so much. The difference between Intel’s operating margin before and after depreciation is about 14% while the industry average difference is about 18%. Reason for this difference will be discussed later when analyzing competing companies.<br />EPS<br />We expect Intel’s EPS to increase to 1.47 by the end of 2010 because of the recovering market and increasing demand. Intel’s customers have begun to increase inventories. S&P analysts believe that sales will rise 19% due to these replenishing inventories of big customers. <br /> <br />P/E Ratio and Stock Price estimate<br />Intel’s 10 year P/E rage is 13-80. Like we saw in 2005, as earnings increase Intel’s P/E will decrease. Analysts have been using a P/E ratio of around 15 to predict 2010 stock prices. We estimate Intel’s stock price at the end of 2010 to be 24.9 (1.47eps X 16.93p/e).<br />32385144780438785135255<br />Cash Flow<br />Intel generates large amounts of cash through operating activities. The question is not whether Intel has enough cash for continued operations, but whether its stockholder return is maximized by Intel holding massive cash reserves. In 2009 Intel reported $3.98B in cash and cash equivalents. In Intel’s defense, it has continued paying dividends through the recession while many other companies have stopped. Also, excess cash gives them the flexibility they need to continue to be the industry leader. On one hand, excess cash may not give investors maximum return, but on the other, it does make Intel a less-risky investment.<br />838200-530225<br />Strengths<br />Intel is definitely leading the industry. They have established a profitable history giving them more access to cash than other companies. Currently, Intel has a very large reserve of cash compared to any competitors. They are waiting to make sure they do not assume too much risk in a foolish investment. Perhaps Intel’s greatest strength is their accounts receivable turnover of 17.3 compared to the closest comparable of 10. At a time when cash is tight, Intel is able to collect almost 15 days earlier than any other company in the industry. They have established a system that creates incentives for corporations and retailers to pay quickly. Other companies are especially struggling because of the economy. They don’t have cash flowing in as quickly as Intel and are not in a position to exploit very profitable opportunities. Another area where Intel is excelling is its amazing profit margin even during a tough year. Intel’s operating margin before depreciation was almost 39% compared to the next highest margin of less than 30%. The profit margin after depreciation is still 25% compared to 21%. By referring to the exhibits following this section, you can see that the majority of the companies recorded negative profit margins after deducting depreciation. Generally, depreciation works as a tax shield, but very few were able to benefit because of economic conditions. They can afford to leverage more because of their name. Intel also has a huge advantage when it comes to economies of scale. Unprofitable projects can be absorbed, unlike in smaller companies. This also allows Intel to engage in riskier projects that could potentially outperform competitors. While the economy was hurting all around, Intel decided to take a harder hit than needed. An account called accrued expenses was huge on Intel’s balance sheet. This has set Intel up in such a way that target earnings will be easier to meet. And most importantly, Intel is a name people know, trust, and show loyalty to. Because of this loyalty, Intel has a huge market share that is difficult for competitors to steal.<br />Weaknesses<br />The problems Intel now faces are a reflection of the new world it finds itself in. It appears to be faced with three conflicting issues: the commoditization of the PC industry, the steady decline of selling prices, and the rise of AMD, which, from the moment it beat Intel to the lGhz processor, found a new confidence. Intel was always the safe choice for the consumer. Whatever else was on the computer box, you could trust the Intel Inside sticker. Today the consumer no longer appears to need that reassurance. They are now looking for the best price. In the past, size has created a huge advantage for Intel, but now that comes with some costs. Intel is in such a hurry to stay ahead of the industry that some of their own products become obsolete due to upgraded products released by Intel. Normally we would look at the current ratio, but we believe this ratio is unrevealing because of the inventory on hand from the drop in sales during the recession. Intel shows a low current ratio, which fortunately is not made up primarily of inventory like competitors. Inventory is also an area of concern. Among the comparables, Intel has the lowest inventory turnover for the last year. Although typically a red flag, we have to realize the state of the economy. With forecasted sales growth, we predict Intel’s inventory turnover will regain its leading position. They are also spread thin while trying to maintain market share. There are too many products becoming available. Intel is also susceptible to a lot of legal costs. Some of these costs may be included into an account that was quietly slipped into the balance sheet. As we filtered through this data, we liked a lot of what we saw, but there was one thing that stood out like a sore thumb. On the balance sheet, Intel had included a liability called accrued expenses. Typically, the liability is current and due within the year. While we mentioned above that this could benefit Intel, it may also put them in a tight cash flow situation later in the future when expenses are actually paid. A lot of legal authorities see Intel as dominant and capable of absorbing legal costs. Smaller companies generally win many of their cases against Intel.<br />Opportunities<br />If you understand the tech industry and can keep up with the pace of innovation, there will always be a growing market. There are also many opportunities to create supply chains that maximize profits for everyone. If a company can become the best at a particular task, multiple companies should use them. By specializing in a particular area, companies create greater capacity and productivity. However, there are risks of losing out on potential profits. Intel has developed internally as much as possible. They outsource very few tasks, because they know that there is a steep learning curve in the tech industry. Companies that can strategically adapt to new environments will survive. Based on the S&P forecasts, sales in this industry should increase by 19% in 2010. Any company with cash and resources available could find a niche and grow at an accelerated pace. Cultures and lifestyles are changing rapidly, and companies that can adapt to constant changes of consumer demand will gain remarkable market share. Technology is becoming an essential to everyday life. Every day there seems to be a new market emerging. Best of all for Intel, there are few dominant competitors.<br />Threats<br />Volatility is the best word to describe the tech industry. Technology is moving so rapidly, it’s amazing that companies are able to keep up with consumer demand. The problem is that many fall behind and never catch back up. The tech industry supports innovation and not much more. Innovation costs money, and companies do not know how the consumer will react to the products. There is no time to test the market before mass-producing; otherwise, competition will steal market share. With so much pressure to enter the market untested, companies run the risk of releasing a malfunctioned product that could completely eliminate loyalty and trust in the company. There are plenty of other options becoming available, and consumers are becoming less and less loyal to particular brand names. As mentioned earlier in the paper, people are some of the tech industry’s largest assets. If employees feel like they are being treated unfairly, they simply walk away with critical and valuable information. Intellectual theft can put a company out of business in a very short time period. Another big threat is the constant threat of disruptive technologies. All it takes is one innovation to wipe out years of research and development. With new discoveries come huge expenses and obsolete inventory. The tech industry is a harsh environment where the weak fall prey to the better-positioned companies like Intel. Another threat to the industry lies within the huge quantities of research and development necessary to compete. If a product is not successful, the tech company cannot capitalize those costs. Financial statements look weak, and issuing more debt becomes extremely problematic. <br /> <br />The following are excerpts from the balance sheet and other ratios supporting the analysis.<br />Macroeconomic Analysis<br />Top-down analysis of Intel’s prospects must start with a look at the global economy. The economy is especially indicative of the health of industry leaders, as their performance often mirrors that of the economy as a whole. Despite an overall decline in the global chip market, Intel’s share of the chip market reached 14.6 percent in 2009, up from 13.6% in 2008. Samsung, Intel’s closest competitor posted revenue growth in 2009. However, its revenue was only slightly more than half that of Intel.<br />A more in-depth look at Intel’s command in its industry is further discussed in another portion of this report. Suffice it to say that Intel’s position as industry leader produces a tight correlation between its performance and the Dow and therefore, the economy as a whole.<br />Current leading indicators foreshadow economic recovery and, therefore, depict Intel as a wise investment. Evidence of an imminent economic recovery can be found through a closer look into current economic growth, federal policy, and relative performance to alternative investments.<br />Economic Forecast<br />4572001186815Economic leading indicators reveal recovery and growth. In the fourth quarter of 2009, the national level of GDP rose by 5.6 percent. Although that number is somewhat misleading (3.7 percent came from re-stocking inventory), it still represents the second consecutive quarter of positive GDP after an entire year in the red.<br />During that same period, nonfarm business sector labor productivity increased at a 6.9 percent. This indicates businesses were getting more production for their labor expenses, ultimately increasing their ability to increase profits.<br />An obvious hindrance of economic growth has been long-time unequalled levels of unemployment of 10 percent and reduced consumer spending. However, increases in unemployment have recently slowed. Economists polled in the latest Wall Street Journal survey expect the U.S. will add an average of 132,500 jobs per month over the next 12 months. That would keep the rate high (9%), but allow the economy to expand its recovery.<br />Underutilization of capacity offers more evidence that employment gains will occur. Ideally, manufacturing companies utilize between 83-85 percent of their productive capacity. Currently, the percent of capacity is 72.7 percent. This represents a strong gain since its low of 68.4 percent last year. <br />This current level of operating capacity provides optimism for two reasons: First, its V-shaped recovery indicates resurgence in production levels and efficiency in manufacturing firms. Secondly, the current level is well below the healthy benchmark level of 83 percent. This leaves room for economic growth without creating inflationary pressures due to overheated capacity levels.<br />Federal Policy<br />Since the beginning of the current recession and in response to risky levels of illiquidity and inaccessibility of credit, the Fed has lowered its target fed funds rate from about 4 percent to just above 0 percent. This has made the cost of borrowing for banks much cheaper and increased liquidity in the financial system. The FOMC recently announced its plan to retain this rate at 0 to ¼ percent as the economy continues to recover. <br />The Fed has also increased the money supply (both M1, and M2) by making large open-market purchases of securities, filling the banks with excess reserves. While it is true that banks have built up abnormally high levels of excess reserves, this will encourage the resumption of private credit flows to American families and businesses as the cautious banks find credit worthy suitors.<br />-2540162560<br />The current yield curve gives further evidence of economic upswing. As depicted, the yield curve rises steeply between one- and ten- and even thirty-year maturities. The current yield spread between 30-year T-bonds and 3-month T-Bills is 4.36 percentage points, much higher than the typical 3 points. This allows some insight to market expectations: because of the associated risks of inflation and higher interest rates, investors are demanding more yield as maturity extends because they are expecting economic growth and look to be shielded from inflation by these higher yields.<br />Relative Performance<br />In conclusion to this section, performance of the firm compared to alternative investments must be considered. According to some analysts, the firm’s stock has a forward earnings yield of 7.14 percent. This is the return generated if profits remained constant and it paid out all of its earnings in dividends. This is par for the industry. For the company to generate decent returns for investors, it will probably only have to experience temperate growth in earnings or market valuation. The stocks dividend yield percentage is 193 points above the industry average. As far as macroeconomic influences, this type of moderate growth is highly likely.<br />Over the past 8 months, Intel has produced returns that top both the industry average and the S&P 500. Its continued advances in technology will allow it to ride an economic recovery to sustain and even improve its returns.<br />In summary, the economy seems to be in the early stages of recovery, slowing unemployment, increasing the money supply, improving productivity, and better utilizing capacity. The growth should be slow but sustainable. As consumers rebuild their savings and portfolios, an increase in investment will occur across the board, increasing the value of Intel stock as an industry leader.<br />