Intel Corp (INTC) is a stock that I’ve followed for quite some time, and that I’ve written about in this space quite a bit over the past year. This is one of the 600-lb gorillas of the Technology sector, after all, and the company that is easily considered the gold standard of companies in the Semiconductor industry. That said, the stock has mostly underperformed the rest of the Tech sector as well as the Semiconductor industry, as analysts and investors have shared concerns about lost market share in the CPU space, especially in servers, to AMD and increasing uncertainty about the path ahead for INTC’s 7nm production.
Despite a strong fundamental profile that included a healthy balance sheet, increasing Free Cash Flow, and strong liquidity throughout the past year, those issues were apparently enough to prompt a change in executive leadership, with Pat Gelsinger, a long-time Intel employee before leaving in 2009 to lead VMWare, taking over for Bob Swan next month. INTC’s last earnings call included verification of some of the strengths I just mentioned, but for most investors the main takeaways were the change in CEO along Mr. Gelsinger’s frank evaluation of 7nm production. Analysts were hoping for a clear outline for what the company will do moving forward – whether they would keep production in-house or begin outsourcing production to alleviate delays, but the earnings call signaled no easy answer, but the outcome will likely be a mixed approach involving both solving the internal problems that caused the delays and outsourcing some aspects of production for other products.
INTC’s stock has been pretty volatile in the aftermath; the stock had begun picking up bullish momentum ahead of the earnings call, especially after news broke about the CEO change, prompting the stock to gap up by more than 10% on an overnight basis. After initially surging to a peak at around $63 immediately following earnings, the stock has dropped sharply back in the last few days, filling approximately half of that pre-earnings overnight gap. The real question at this point isn’t just about what a new CEO will do to move things forward, but also what he has to work with, and whether those elements still combine to give value investors a reason to stay bullish about the stock’s long-term prospects.
Fundamental and Value Profile
Intel Corporation is engaged in designing and manufacturing products and technologies, such as the cloud. The Company’s segments are Client Computing Group (CCG), Data Center Group (DCG), Internet of Things Group (IOTG), Non-Volatile Memory Solutions Group (NSG), Intel Security Group (ISecG), Programmable Solutions Group (PSG), All Other and New Technology Group (NTG). It delivers computer, networking and communications platforms to a set of customers, including original equipment manufacturers (OEMs), original design manufacturers (ODMs), cloud and communications service providers, as well as industrial, communications and automotive equipment manufacturers. It offers platforms to integrate various components and technologies, including a microprocessor and chipset, a stand-alone System-on-Chip (SoC), or a multichip package. The CCG operating segment includes platforms that integrates in notebook, two in one systems, desktop computers for consumers and businesses, tablets, and phones. INTC’s current market cap is about $225.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings were flat – exactly 0% while sales slipped by about -1.14%. In the last quarter, earnings increased nearly 37%, while sales were almost 9% higher. INTC operates with a very robust, strengthening margin profile; Net Income versus Revenues over the past year was almost 27%, and improved in the last quarter to a little over 29%. This is a measurement that has reflected some of the internal difficulties they have dealt with, along with the impact of COVID-driven declines in its data center business throughout the year, but this could be a sign that better things are ahead. The fact is their operating profile gives INTC a lot of flexibility and continues to be a source of strength.
Free Cash Flow: INTC’s free cash flow is healthy; in the last quarter, it came in at $20.9 billion, which is an improvement from the $20.3 billion of the quarter prior, and significantly above the $16.9 billion at the end of 2019. That translates to a Free Cash Flow Yield of about 9%. The percentage is attractive, but the size of the actual number is a reflection of the company’s operating strength, which should serve it well even if broad economic uncertainty and concern about its data center business continues; it will also help management navigate the still-to-be-determined approach to 7nm production.
Debt to Equity: INTC has a debt/equity ratio of .42. This is a conservative number. The company’s balance sheet indicates that operating profits are adequate to service their debt, with $23.8 billion in cash and liquid assets (down from $25.8 billion in mid-2020, but still healthy) versus $16 billion in long-term debt. It is noteworthy that their current long-term debt is significantly lower than the $36 billion reported in the quarter prior. With a healthy operating margin profile along with a sizable cash position, servicing their debt isn’t a problem.
Dividend: INTC pays an annual dividend of $1.39 per share, which translates to a yield of 2.51% at the stock’s current price. It should also be noted that management it announced it is raising the dividend in the last earnings call from $1.32 per share – which should be taken as an indication of further fundamental strength.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $72.50 per share. That means that INTC is trading at a 31% discount right now, which makes the stock very interesting. INTC’s current long-term price target is also about $4.50 above the target this analysis provided as recently as last month, when my “fair value” price was around $68.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last year of price activity for INTC. The red diagonal line traces the stock’s drop to a bear market low in November a little below $44; it also provides the baseline for the Fibonacci retracement line on the right side of the chart. After following the sector to a nice peak at around $63 in June, the stock gapped back down at the end of July to a low at around $47. After climbing back to a high a little above the 38.2% retracement line around $53.50 in October, the stock gapped back down again after that quarter’s earnings report. A temporary rally in late December saw it climb to about $51 before falling back again until about a week ago where it found a pivot low at around $45 and began climbing again. The overnight gap in mid-January came when the change of the CEO was announced, with the market pushing the stock to a peak at about $62.50 on the day earnings were released. The stock has dropped sharply down from that point, which most analysts are attributing to the continued lack of clarity about 7 nm production. Immediate resistance is back at at around $59, based on highs just prior to the $62 peak, while the stock appears to be finding support around $55 based at the 50% retracement line, and pivot high activity in October. I also think $55 as support is strengthened by a technical premise associated with gaps, which suggests that stocks often fill about 50% of overnight gaps – no matter which direction the gap occurred – before reversing higher again. $55 is a good mid-point for that gap, which means that a drop below support at $55 could see additional downside to a range between $53 and $51.
Near-term Keys: I think INTC’s recent increase volatility is a short-term phenomenon; as new management takes over and begins to provide more information about the company’s path in 2021, I expect the stock to return to more typical levels of day-to-day activity. In the meantime, Mr. Gelsinger, a long-term INTC insider, has a lot of good material to work with, and plenty of financial resources to navigate whatever comes up this year. That, along with the stock still-impressive value proposition are the reasons that I think INTC remains an excellent bargain at its current price, and is still a smart bet to make this year. If you prefer to focus on short-term trading strategies, a bounce off of support at around $55 could provide a good bullish signal to buy the stock or work with call options, using $59 as a practical near-term profit target. If the stock drops below $55, you could also consider shorting the stock or buying put options, but keep in mind that next support is probably around $53 unless bearish momentum really accelerates; in that case, $51 is more likely as a profit target on a bearish trade.