Intel Corp (INTC:NSQ) Stock: Analysis

Intel shares are traded on the Nasdaq under the ticker "INTC". The company currently holds the position of world leader in semiconductor manufacturing. It mainly produces microprocessors, motherboards, flash memory and graphics processors. The American giant has a whopping 110,000 employees spread across the world and its origins date back to 1989.

Intel stock valuation

Intel stock is trading at a surprisingly cheap price in this period of overheated markets. This is especially true for a company of this caliber that operates in the high-tech field. Indeed, Intel stock prices are trading at:

• 10.43 times current recurring earnings
• 13.58 times average recurring earnings
• 4.84 times tangible assets
• 2.69 times book value
• 2.8 times sales
• 10.32 times current free cash flow
• 15.98 times the average free cash flow

From the point of view of profits and free cash flow, the situation is therefore quite interesting for investors. If we compare to Schiller PE ratio The current US market ratio, which stands at 39 times average earnings, is quite a feat. The situation is admittedly a little less interesting in relation to assets. However, this is largely explained by the strong intangible component specific to this sector of activity. The ratio also seems quite high in relation to sales. However, as we will see later, Intel largely compensates for this with indisputable profitability.

Valuation relative to enterprise value

It often happens that an attractive price/earnings ratio actually hides a capital structure marked by high debt. This is far from being the case at Intel. This can be seen by using valuation quotients based on enterprise value (EV), rather than market capitalization. In doing so, we correct for a potential bias induced by debt. For Intel stock, this gives us:

• Current EV/FCF: 10.91
• Average EV/FCF: 15.40
• EBIT / EV: 10.28%
• EBITDA / EV: 10.37%

These figures are perfectly consistent with those already noted above. Whether in relation to its capitalization (share price) or its enterprise value, the profits and cash flows offered by Intel are attractive.

Intel Stock Dividend

Technology and dividends rarely go hand in hand. However, Intel is already celebrating its bronze anniversary, with 22 years of uninterrupted dividends. Above all, the current dividend yield of 2.6% is twice that of the S&P 500. It is even 2.6 times higher than that of the Nasdaq. Here we are in line with the aforementioned valuation ratios.

It should also be noted that this generosity towards shareholders has little impact on the company's results. Indeed, dividends represent:

• 25.66% of current profits
• 30.46% average profits
• 27.85% of current FCF
• 39.31% of average FCF

Intel therefore has ample room to continue rewarding its shareholders in the future, and even to increase its distributions, as it has done in the past. Over the past five years, the company has increased its dividend at an average annual rate of nearly 5%.

Long term results

Just like dividends, profits, asset values and cash reserves are growing over the long term. This proves the strength of Intel's business model. The company is managing to create value for its shareholders and this is reflected in the stock, which has more than doubled over the last ten years. However, it should be noted that INTC's stock performance is well below that of the market over the same period. The S&P has grown twice as fast and the Nasdaq almost four times as fast. The dividends paid certainly partly compensate for this relative underperformance, but that does not explain everything. We will see the reasons for this discrepancy a little later.

Cash reserves

We have already partly understood it thanks to the valuation ratios, money is flowing freely into the accounts of the American semiconductor giant. The company therefore has abundant reserves (without however being excessive), with a current ratio of 1.91 (a sharp increase compared to the previous financial year). The quick ratio has nothing to be ashamed of either, with 1.57. Unsurprisingly, Intel has a more than comfortable margin to honor its invoices and avoid default.

Profitability and profitability

As we already mentioned in the first part, Intel has indisputable profitability. The gross margin thus amounts to 56% (slightly down, however). The free cash flow margin and the net margin are simply astonishing, with nearly 27% each. As for profitability, the picture can be described in an almost identical way. The ROA thus flirts with 14% (also slightly down), while the CFROA climbs to 23% and the ROE even to nearly 26% (despite a fairly low debt).

Such profitability and profitability ratios are not encountered every day. We will see a little later what can explain them.

Debt

As we were talking about with the enterprise value, Intel's capital structure relies relatively little on debt. Debt thus represents 0.45 times equity. Compared to assets, long-term debt amounts to nearly 22% (increasing). This may seem significant, but, thanks to its abundant free cash flow, Intel would be able to amortize its entire debt in less than three years.

Returns for Intel Stock Owners

Despite a healthy overall debt position, the net debt issuance has represented, over the last five years, a negative return for shareholders of -0.4%. On the other hand, over the same period of time, the company has regularly reduced its number of shares outstanding, resulting in a positive return for shareholders of 2.8%.

With the dividend, the total return for Intel shareholders has thus represented over the last five years a nice 4.6%. The company used 81% or FCF to do so. It should therefore continue to be able to ensure a similar generosity for its owners in the future, without however being able to significantly increase it.

Oligopoly and entry barriers

How can we talk about Intel without mentioning its oligopolistic situation. Intel microprocessors equip 3/4 of the PCs sold each year across the planet. The American company certainly faces some opponents, such as AMD on the PC market or Samsung, but it has many competitive advantages, not only compared to these known direct opponents, but especially compared to any newcomer on the market.

The semiconductor industry is indeed characterized by a need to remain at the forefront of technology, while relying on very significant production resources and a vast distribution network. Intel is constantly investing to keep these elements under control, which is characterized by very high R&D costs and, more generally, high capital expenditures.

The manufacturing process requires hundreds of steps in "clean rooms" with near-perfect air. Building a single factory costs billions of dollars. Intel is one of the few companies that manufactures its products in its own facilities, which allows it to keep quality under control and ensure supply. Thanks to economies of scale and vertical integration, Intel can also introduce new products to the market at a very rapid pace. Few companies have the financial resources to design, manufacture and distribute these very high-tech products. The barriers to entry in this industry are therefore enormous. Even if a competitor succeeds, it must still be able to keep up with the very high pace of chip renewal. Technological leaps are constant and significant.

Franchise

In addition to these financial, technological and logistical obstacles, there is the reputation of the Intel brand, the dependence and loyalty of its customers, as well as its intellectual property portfolio. The American manufacturer of electronic chips therefore has the qualities of a franchise, a concept dear to Warren Buffett. On a financial level, this translates into:

• a very high average gross margin over the last five years (59.7%)
• an average net margin over the same high period (25.7%)
• relatively low average overheads over the same period (16.9%)
• an increase in goodwill
• a correct debt/equity ratio (0.45)

If the American billionaire does not currently own Intel shares, it is perhaps in particular because of the significant capital expenditures required for the company's development. These are in fact represented 76.2% of the average profit over the last five years. It is perhaps also in relation to certain uncertainties linked to the PC market.

Risks and Opportunities for Intel Business

The world of computing has changed considerably over the last twenty years. Back then, computing rhymed with PCs. Today, they find themselves drowned among the plethora of screens of all kinds, tablets, smartphones, smart TVs and other connected devices. When the PC market lags behind, Intel also suffers. The trend towards mobile devices is not about to stop, quite the contrary. We can see, in this change in consumption habits, one of the elements that explains the relative underperformance of the stock compared to the market over the last ten years.

However, Intel has a strong backbone and the ability to renew itself. To do this, it is increasingly relying on processors dedicated to data centers, a market that is growing and which it also dominates. It is also moving towards the promising markets of artificial intelligence, the Internet of Things and driverless cars. In the same vein, Intel has recently launched into the production of graphics cards to compete with AMD and Nvidia. This market is currently completely dried up by the monstrous demand linked to mining of cryptocurrencies. There is therefore certainly a move to be made for the American company in this segment.

Intel Stock Risks

As always, it is difficult (and futile) to establish scenarios that are too long term in relation to the development of a company and its industry. We note that its market is undergoing transformation, but that Intel has the means to deal with it. We cannot speak here of a technological shift, but rather of a change in consumer habits and a reorientation towards certain markets. A Kodak scenario therefore seems unlikely.

What we do know now, however, is that Intel is a very financially solid company. We have seen this with its cash reserves and its relatively low debt. This is also confirmed by the Altman score of 3.55, placing the American giant in the "green" zone. The risk of bankruptcy is therefore minimal. The Piotroski score, with five points, certainly confirms that the company is not in danger, but still reflects some difficulties, at least temporary ones. We have already mentioned a slight drop in profitability and profitability compared to the last financial year. We have also talked about the increase in debt, even if it remains at a correct level.

Intel Stock Momentum and Volatility

These latest elements shed new light on the difficulty of the stock to really take off for several months, even years. The recent momentum of Intel shares is not extraordinary, negative over the last six months and positive over the last twelve months, but well below the market.

The stock's volatility stands at 33% over the last twelve months, which is quite reasonable for a "techno" stock. Even better, the beta is only 0.6, which means that the stock is relatively insensitive to market fluctuations, which is rare for a company of this type.

Institutional

Intel, with a market capitalization of $217 billion, is among the S&P 500 behemoths, in 31st place. Institutional investors are jostling for position, including BlackRock, Dimensional Fund Advisors, Norges Bank, Capital Research & Management, SSgA Funds Management, Vanguard, Amundi, Fidelity, etc. They have inside information and resources that favor them to the detriment of small investors. Furthermore, if institutional investors start to exit the stock, the downward volatility could become very significant.

Conclusion

For a stock of this quality and caliber, INTC is trading at an attractive price. It also offers a generous yield. The company is profitable, profitable and solid, although it is going through some turbulence, linked to changes in consumer habits. It has significant competitive advantages, particularly in terms of R&D, manufacturing and brand awareness.

For buy & hold investors looking for yield and capital gains, Intel is certainly a nice opportunity in these times. Personally, however, I find it too big and too exposed to institutions. The momentum of the last few months does not encourage me to take action either.