Topic: Dividend Stocks

Intel Corp. trades at a 9.6 P/E despite spending heavily for a bright R&D future

December 29, 2020|by Jim Bates

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This firm’s expansion into new growth areas such as 5G network infrastructure, artificial intelligence, and self-driving cars should fuel its growth for years to come. 

In the meantime, the firm’s solid balance sheet is helping it cope with a 4.6% revenue drop due to lower microchip demand from corporations and governments. 

INTEL CORP. (Nasdaq symbol INTC; www.intel.com) is the world’s leading maker of computer chips: its products power 90% of all personal computers and more than 80% of all data centres.

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To cut its reliance on personal computers, Intel has used acquisitions to expand into faster-growing markets such as cloud computing, self-driving cars and artificial intelligence (AI).

For example, in late 2015, it paid $16.7 billion for Altera Corp., a maker of chips called field programmable gate arrays (FPGAs). Users program them to perform specific tasks, which makes server computers faster. FPGAs will help Intel profit as more businesses shift to cloud computing.

The company also purchased Mobileye N.V. in 2017 for $15.3 billion. Based in Israel, it specializes in computer systems and chips for self-driving cars.

Due to those new businesses, Intel’s revenue rose 30.0%, from $55.4 billion in 2015 to $72.0 billion in 2019. Earnings climbed 109.9%, from $2.33 a share (or a total of $11.4 billion) in 2015 to $4.89 a share (or $21.9 billion) in 2019.

The company continues to make promising acquisitions. In May 2020, it purchased Moovit Inc. The Israel-based firm makes a mobile app that provides public transit users and motorists with maps and other information to help them plan their routes. The app now has over 800 million users covering 3,100 cities in roughly 100 countries. Moovit’s technology will enhance the impact of Mobileye.

Intel paid $900 million for Moovit, or $840 million if you factor in the value of its earlier investment in this tech company.

At the same time, the company continues to sell less-promising businesses. Those include a new deal to sell its struggling flash memory chip business to South Korea’s SK Hynix Inc. Manufacturers of mobile phones, digital cameras and other devices use flash chips to retain information without power.

Intel will receive an initial payment of $7 billion in late 2021, assuming it can secure the necessary government approvals for the sale. When the sale does close—probably in 2025—it will receive an additional $2 billion.

Meantime, in the quarter ended September 26, 2020, Intel’s revenue fell 4.5%, to $18.33 billion from $19.19 billion a year earlier. That reflects lower demand from corporations and governments for chips to power datacentres. The drop offset better sales of PC chips as the COVID-19 pandemic spurred people working from home to buy laptops.

Dividend Stocks: Higher costs should be overcome by R&D spending

With lower average selling prices for the company’s chips—plus higher operating costs—earnings before one-time items dropped 25.7% in the quarter, to $4.68 billion from $6.29 billion. Per-share earnings fell at a slower rate of 21.8%, to $1.11 from $1.42, on fewer shares outstanding.

The higher costs are partly related to a “defect mode” in the manufacturing process for Intel’s next generation 7-nanometer chips. That will delay shipments of its first 7-nanometer chips made for PCs to late 2022 at the earliest. It could also let other chipmakers, who are now selling 7-nanometer chips, eat into Intel’s dominant market share. The delays have already challenged the stock’s performance in 2020.

Still, Intel continues to invest heavily in the development of new products. In the third quarter, that spending rose 2.0%, to $3.27 billion (or 17.8% of revenue) from $3.21 billion (or 16.7% of revenue).

At the same time, apart from research, the company invests considerable amounts on capital spending to build and equip its factories to meet current and future demand. In all, those outlays total 35% to 40% of revenue.

Those capital costs may come down in the next few years as Intel looks to outsource more of its chip production; other firms already make about 20% of its chips. The change would also give it more flexibility. However, many of the top chip-making plants in Asia, including those run by Taiwan Semiconductor Manufacturing, currently have limited spare capacity.

Intel’s high market share and solid balance sheet will let it keep improving its products and businesses. As of September 26, 2020, the company held cash and investments of $18.25 billion, while its long-term debt of $36.1 billion is a low 19% of its market cap.

What’s more, Intel’s free cash flow (regular cash flow less maintenance capital expenditures) in the first nine months of 2020 jumped 29.0%, to $15.1 billion from $11.7 billion for the same period in 2019.

That gives the company lots of room to pay down its debt and keep raising your dividend. With the March 2020 payment, Intel raised the quarterly payment by 4.8%. The new annual rate of $1.32 a share yields 2.8%. Dividends accounted for just 27.8% of its free cash flow in the first nine months of 2020.

For all of 2020, Intel now expects to report revenue of $75.3 billion, which is better than the $75.2 billion consensus forecast. As well, earnings will likely range from $4.85 to $4.90 a share, which is better than the $4.85 consensus estimate.

The stock now trades at just 9.6 times the midpoint of its new earnings forecast. That’s a low p/e for a market leader with such high research spending.

Recommendation in Wall Street Stock Forecaster: Intel Corp. is a buy.