I’m something of a movie buff. I memorize the dialogue from my favorite movies and drive my family nuts when they try to watch a movie with me because I’ll voice the dialogue out loud with the characters. I guess it shouldn’t be too much of a surprise, then to admit that I often find myself recalling the sound bites from many of them whenever they seem to fit some aspect of life. One of my all-time favorite movies is “The Man from Snowy River,” and one of my favorite sound bites from that film comes early in the story, when Kirk Douglas’ crusty codger tells the young hero, “don’t throw effort after foolishness.” That bit of advice comes back to me fairly often, and I think certainly has solid application in the always challenging process of making sound investment decisions.
As a contrarian who prefers to emphasize value, I’ve learned to look for stocks that have fallen out of favor with the rest of the market. I often like it even more when I see analysts, talking heads and other investors dismissing a company because their stock price has fallen so far, for so long that it may seem like there is no way it could ever recover.
I think the opportunity is even better if the company being maligned also has a solid fundamental profile with a leading position in its industry group. An added bonus sometimes even comes when an entire sector is getting beaten down by broad market conditions. While sometimes those concerns are legitimate, in the long run it usually also only means that a larger number of fundamental solid companies in that sector are likely to offer attractive valuations that should translate to useful investing opportunities.
Intel Corp (INTC) is a stock that I’ve followed for quite some time, and that I’ve written about in this space periodically for quite a while. This is one of the 600-lb gorillas of the Technology sector, after all, and the company that has long been considered the gold standard of companies in the Semiconductor industry. The luster on the company’s reputation has been tainted, to say the least over the past two or three years, as challenges in the semiconductor industry that pre-date 2020 have created openings that INTC’s competitors have been able to take advantage of. These are among the primary reasons the stock has mostly underperformed the rest of the Tech sector as well as the Semiconductor industry for most of the past two years, as analysts and investors shared concerns about lost market share in the CPU space, especially in servers, to AMD along with increasing uncertainty about the path ahead for INTC’s 7nm production.
Despite a generally solid fundamental profile that has included a healthy balance sheet, strong liquidity, and an increasingly attractive dividend, those issues were apparently enough to prompt a change in executive leadership at the beginning of 2021, with Pat Gelsinger, a long-time Intel employee before leaving in 2009 to lead VMWare, taking over for Bob Swan. In the first part of 2021, after the change in leadership had taken place, the stock surged to an April 2021 peak at around $68.60 before falling back to a support level at around $48 in November. From that point, the stock stabilized and even began to rally in the latter part of December 2021, hitting a mid-January peak at around $56. Broad market uncertainty, and specific bearish sentiment about the Tech sector fueled even further by inflation fears and Russia’s invasion of Ukraine has pushed the stock down to a recent low this week at around $43.50. Analysts and talking heads seem to be uniformly bearish about the entire Tech sector, and are quick to point out the market share losses INTC has faced in the CPU server space to competitors like Advanced Micro Devices and Nvidia.
The irony I find in the stock’s underwhelming performance is that the company’s most recent earnings reports show that many of INTC most important fundamental strengths, including massive liquidity, manageable debt and increasing profitability still exist; perhaps the disconnect comes from Mr. Gelsinger’s deliberate method to unraveling 7 nm production problems. In March of last year, the company announced it would invest $20 billion to create Intel Foundry Services, a major expansion of Intel’s manufacturing capacity that includes building two factories in Arizona with an intention to become a major global provider of semiconductor foundry capacity in the U.S. and Europe. The move looks like a great opportunity to benefit from a global desire for non-Asian capacity – but the long-term reality of this project, along with a material decline in Free Cash Flow seem to have given the market enough fuel to keep the stock’s downward trend in place.
Questions remain, of course about how quickly enterprise spending on IT infrastructure will rebound as the year progresses; this is a side of INTC’s business that held progress back in 2020 as businesses were forced to shift to work from home models that de-emphasized spending on traditional IT purchases. Does that mean that considering a new investment in this stock is a perfect example of “throwing effort after foolishness?” I don’t think so; in fact, I think there is instead an opportunity that the broad market is largely ignoring about INTC as a solid, long-term value opportunity.
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 $184.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -37.41% while sales also declined, by 2.75-6.71%. In the last quarter, earnings were about -20.2% lower, while sales fell by -10.6%. Countering the negative earnings pattern just described, INTC operates with a robust margin profile that strengthened significantly in the last quarter; Net Income versus Revenue over the past year was 31.68%, and grew in the last quarter to 44.21%. It is worth noting that while company’s investment in developing its foundry business is certainly expected to increase revenues and drive volume, it is also seen as focusing on a lower-margin area of business, which could compress Net Income results in the future.
Free Cash Flow: INTC’s free cash flow is generally healthy, but also reflects some of the weakness shown by its negative earnings pattern; in the last quarter, it came in at about $9.6 billion, versus $16.3 billion a year ago. The current number translates to a Free Cash Flow Yield of about 5.22%. The drop over the past year is a concern, and bears watching in the quarters ahead.
Debt to Equity: INTC has a debt/equity ratio of .32. This is a conservative number. The company’s balance sheet indicates that operating profits are adequate to service their debt, with about $38.7 billion in cash and liquid assets (compared to $29.2 billion in the previous quarter) versus $32.7 billion in long-term debt (compared to more than $35 billion two quarters ago). Even with the challenges described by earnings and Free Cash Flow, the company maintains a healthy, increasing operating margin profile along with a sizable cash position, which means that servicing their debt isn’t a problem.
Dividend: INTC pays an annual dividend of $1.46 per share, which translates to a yield of 3.04% at the stock’s current price. It should also be noted that management raised the dividend at the beginning of 2021 from $1.32 per share, and $1.39 per share two quarters ago. An increasing dividend is a sign of management’s confidence in their long-term strategy, which is why I take it as an additional indication of 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 at around $61 per share. That means that at its current price, INTC is trading at an impressive 36% discount right now.
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 downward trend from a peak in June of last year at around $58.50 to its 52-week low at around $43.50 earlier this week. it also provides the baseline for the Fibonacci retracement lines on the right side of the chart. Current support is at the 52-week low at $53.50, with immediate resistance sitting at around $46. A break above $46 could have near-term upside to about $48.50, with $51.50 acting as tertiary resistance if buying activity starts to pick up. A drop below $43.50 could see the stock fall to about $41 (using the distance between current support and immediate resistance) before finding next support.
Near-term Keys: INTC’s overall fundamental strength remains healthy, despite some clear challenges that are challenging not only this company, but also the entire industry. Taking advantage of the value proposition right now is a clearly contrarian strategy, and given the broad bearish momentum plaguing the entire sector, is only advisable if you are also willing to tolerate the likelihood of continued volatility in the near term. If you prefer to focus on short-term trading strategies, a push above $46 could provide a good bullish signal to buy the stock or work with call options, using $48.50 as a useful, near-term profit target. If the stock drops below $43.50, you could also consider shorting the stock or buying put options, with expected next support at around $41 offering a practical short-term target on a bearish trade.