Intel Corporation
(NASDAQ : INTC)
Stock Report | Student Managed Fund
February 9, 2004
Chris Bodnar
MBA Candidate
May 2004
BUSINESS SUMMARY:
Intel Corp is one of the world's largest semiconductor chip makers, supplying
the computing and communications industries. Products supplied to these
industries by Intel include microprocessors, chipsets, network processor
chips, embedded control chips, and flash memory used in cellular handsets
and handheld computing devices. Board level products include Ethernet
network interface cards and complete PC motherboards for OEMs. End
markets for Intel products include Personal Computers (PCs), servers, and
networking and communications equipment.
Intel Corporation
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
www.intc.com
Symbol: INTC
Date:
2/9/04
PE (TTM):
Market: NASDAQ NM
Price:
$30.57
Fwd PE (5y):
Div. Yield:
.52%
PEG:
1.6
OS Shares: 6,532 mil.
52 Wk-H:
$34.60
 (5y)
2.04
Mkt Cap: $199.7 bil.
52 Wk-L:
$14.50
 (3y)
6.64%
% of High:
98.6%
Sharpe ratio:
.096
Peer Subset:
% of Low:
204.5%
Treynor Ndx:
.027
Adv. Micro Devices
Altera Corp.
Fairchild Semi.
Infineon Technologies
Integrated Device Tech.
LSI Logic
STMicroelectronics
Xilinx, Inc.
Employees: 86,100
35.93 x
HEADQUARTERS:
24.2 x
150%
Cumulative Return
100%
INTC
50%
GICS SECTOR:
Information Technology
SUBINDUSTRY:
Semiconductors
AMD
ALTR
FCS
IFX
IDTI
LSI
STM
XLNX
SOXX
0%
S&P
500
-50%
STANDARD & POOR’S
2/7/04
Date
Buy
S&P Opinion
5
Stars
4+
Outlook
$32.40
Fair Value
209
Invest.Quot.
$45/sh
12 Mo. Target
A
Earn./Div. Rank
Buy
S&P Adj. Consensus
47
No. of Analysts Rptng
Scale
1 to 5
1- to 5+
0 to 250
D to A+
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
-100%
Value Line
Date 1/16/04
3
Timeliness
3
Safety
3
Technical
A++
Fin. Strength
Ind. Ranking 10 of 98
$60/sh
Target High
$40/sh
Target Low
BODNAR RECOMM.: BUY
Valuation
Model
Value
$32.19
Upside to
Target
5.0%
Disc. FCF:
36.94
20.8%
DCF 1yr. Fwd.:
42.30
38.4%
Disc.Earnings:
C. Bodnar
Page 1
BUSINESS SUMMARY
Intel (‘Intel’, ‘INTC’, or ‘the Company’) is the world’s largest semiconductor chip maker. It is
well known for its dominant market share in microprocessors for personal computers, estimated
at approximately 80%. Although the PC processor is a commodity, INTC has expanded its
product lines to serve the networking and communications markets. The company’s stated
mission is to be the preeminent building block supplier to the worldwide Internet economy,
indicating that its ambitions extend well beyond just PCs.
The Company’s main operating groups are: Intel Architecture Business (more than 83% of total
sales in 2002), Intel Communications (8%), and Wireless Communications and Computing (8%).
Intel Architecture Group (IAG)
The Intel Architecture Business Group works on microprocessor and chipset products for the
desktop and mobile computing platforms, as well as high-performance microprocessors for
servers and workstation markets. Intel introduced the first microprocessor in 1971, and has
been the technology leader ever since.
Wireless Communications and Computing Group (WCCG)
The INTC WCCG makes a variety of wireless-related chips for handheld devices, mobile
phones, and wireless computing. The products include:
SEGMENT
APPLICATIONS
Application Processors
Process the data functions on calendar and email programs
for wireless handheld devices and cellular phones
Baseband Chipsets
Enable voice communication
Flash memory
A type of memory used for code storage in such devices
and retains data when a device's power is turned off.
While IAG continues to dominate Intel's revenue, WCCG is likely to grow at a faster rate over
the long term. Additionally, IAG and WCCG will be driven by end-user products outside the
traditional PC and handset market, including products like the XBOX, Digital Video Recorders,
Home Gateways, PDAs, and mini-servers to store digital content & distribute it around the house.
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Page 2
Internet Communications Group (ICG)
The ICG makes chips used in a variety of communications systems including Internet
infrastructure, corporate networks, access devices and local area networks and home
networks to name a few. INTC produces both hardware and software for voice and data
networks. The products span copper and optical networks and include end products such as:



Network communications hubs
Routers
Switches



Cellular phone base stations
Factory floor automation instruments
Laser printers
C. Bodnar
Page 3
INDUSTRY ANALYSIS
The chip industry has historically been subject to intense boom and bust cycles, but in the 19752000 period, annual sales growth averaged 16.1% according to Semiconductor Industry
Association data. As the industry matures, this cyclical trend is likely to continue, but the longterm growth rate for the industry as a whole is also likely to come down. During 2003, the
Philadelphia Semiconductor Index (^SOXX) outperformed the broader market year (see below).
Because the index is market-capitalization-price weighted, its return is greatly dependent on the
performance of Intel – aka. the world’s largest chip company. If the economy continues to grow
at its current pace, the semiconductor industry follow suit. Additionally, increasing obsolescence
of tech equipment bought in 1999 for Y2K compliance could bolster the performance of this
sector
TABLE 1
A
list
of
the
10
largest
semiconductor companies ranked
by
semiconductor
revenues
is
shown in Table 1. The list also
reveals the industry’s international
scope.
Japan
The United States and
each
contribute
three
companies to the top 10; Europe
has two; and South Korea has one.
INTC is almost three times larger
than the No. 2 company, Samsung
Electronics Co. Ltd. In fact, Intel’s sales in 2002 were higher than combined sales for Samsung
plus the next two largest chipmakers, Texas Instruments Inc. and STMicroelectronics NV.
Philadelphia Semiconductor Index (^SOXX)
The SOXX was created in December 1993 and is market cap price weighted index composed of
18 US semiconductor companies primarily involved in the design, distribution, manufacture, and
C. Bodnar
Page 4
sale of semiconductors. The following is a list of the names of the companies currently included
in the SOXX:
Altera Corp
Micro Technologies
Applied Material
Maxim Integrated Products
ADV Micro Device
National Semiconductor
Broadcom Corp
Novellus Systems Inc.
INTEL Corp.
STMicroelectronics NV
KLA Tencor
Teradyne Inc.
Linear Technology Corp.
Taiwan Semiconductor
LSI Logic Corp.
Motorola Inc.
Texas Instruments
Xilinx Inc.
The following chart shows Intel’s 5-year cumulative weekly returns plotted against the SOXX
and the S&P 500 Indicies:
150%
Cumulative Return
100%
INTC
50%
SOXX
0%
S&P
500
-50%
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
-100%
The results of this time series plot can be summarized as follows:
Symbol
Cumulative
Return (%)
PV of $10K invested
on November 30, 1998
INTC
17.38
$11,738
SOXX
43.51
14,351
SPX
- 9.50
9,050
C. Bodnar
Page 5
FINANCIAL SUMMARY
Revenue
$28,560
Revenue (Millions of $s)
Revenue (Millions of $s)
$33,726
$29,389
$26,273
$26,539
$26,764
$695
1998
1999
2000
2001
TTM
2002
Peers TTM
1.8
1.8
INTC’s
Y/Y trend in revenue is shown above. The Company’s
top line has won it the spot of the
1.6
1.6
1.57
1.57
1.4
1.4
largest
market share out of all semiconductor manufacturers
in the world. It had captured
1.2
1.2
EPS
EPS
1.1
1
$28.6B
through 1.1the TTM ending September 30, 2003.
The industry
average for INTC’s peer
1
0.8
0.8
0.91
0.91
0.6 drop-off in revenue is attributable to the
group
was
only $695M for the same
period. The 2001
0.6
0.47
0.47
0.4
0.4
0
0
0.2
contraction
that occurred in the
U.S. economy as a result
of the burst of the technology
bubble.
0.2
0.19
0.19
1998at FYE
1999 2003.
2000
The Company
is on target
to
grow2002
its Y/Y revenues by 10%
1998
1999
2000
2001
2001
2002
Earnings
0.8
1.8
1.6
0.7
1.57
1.4
0.6
0.5
1.1
1
EPS
EPS
1.2
0.8
0.69
0.91
0.4
0.3
0.6
0.47
0.4
0.2
0.2
0.05
0.1
0.19
0
0
1998
1999
2000
2001
2002
TTM
Peers TTM
The Semiconductor industry has experienced contractions beginning in FY 2000 – INTC
included. This period mirrored the broader U.S. economic downturn. There are two notable
observations: INTC’s earnings bounced beginning in FY 2001 and the Company has produced
positive EPS (Q1 2003 EPS was unchanged) for seven consecutive quarters. The Company
continues to garner the largest share of earnings of the semiconductor market.
C. Bodnar
Page 6
Profitability
20.0%
35.0%
31.2%
25.0%
24.9%
23.1%
20.0%
15.0%
15.0%
11.6%
10.0%
Philadelphia
Semiconductor Index
5.0%
Net Profit Margin
Net Profit Margin
30.0%
15.8%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-16.7%
-15.0%
4.9%
0.0%
-20.0%
1998
1999
2000
2001
2002
TTM
INTC’s net profit margin tracks to its earnings.
Peers TTM
This is indicative of the scalability and
leveragability of Company’s operations to meet demand and contain costs during times of plenty
and contractions. Once again, INTC demonstrated dominance over its peer group by producing
solid net profit margins in contrast to the industry’s losses.
Dividends
$0.10
ten years, it has grown its dividend at a 25% CAGR.
DPS
Yield
$0.08
This compares to an 8% CAGR in EPS over the
$0.07
$0.06
same period. Its annual dividend in 2003 is expected
$0.04
0.137%
1998
INTC began paying dividends in 1993. Over the last
to match the 2002 payout level. The annual yield
0.147%
0.235%
1999
2000
0.256%
2001
0.645%
remains low because INTC’s stock value is
2002
relatively
high,
trading
at
PE
multiples
of
approximately 30x on average
30x over the long run. Intel is only one of a
$0.08
D
P
S
handful of semiconductor companies in the
industry to pay a dividend. According to Value
Y
L
D
Line, dividends are expected to grow at
approximately 11%-12% over the next five
years.
$0.01
0.239%
TTM
0.097%
Peers TTM
C. Bodnar
Page 7
Capital Structure & Leverage
0.40
INTC’s balance sheet is strong.
0.3770
The
0.35
Company is extremely deleveraged in its
0.30
0.25
D/E
capital structure relative to the industry
0.20
average.
0.15
0.10
0.05
This contributes to its overall
financial strength and lower financial risk
0.0300 0.0294 0.0189 0.0293 0.0262 0.0236
inherent in the business.
0.00
Dec-98 Dec-99 Dec-00 Dec-01 Dec-02
TTM
Peers
TTM
Value Line gave
INTC its highest rating of A++ for financial
strength. The small amount of debt that Intel carries is not a burden on earnings either as its TIE
ratio is 108x that of the industry average for the
120
TTM period. The Company’s interest coverage
100
Interest Coverage Ratio
102.8
ratio used to be much larger than it currently is
weighed down in recent years by the pattern in
revenues. The amount of debt the Company
carries in its capital structure has remained
80
60
40
20
(5.5)
(20)
fairly constant over the last decade.
TTM
Peers TTM
Efficiency
Intel’s management efficiency can be best shown through an analysis of ROA (see below). Long
term and fixed assets have remained fairly constant over the last decade. Once again, this
demonstrates how the economic downturn that weighed heavily on the tech sector beginning in
FY 2000 affected INTC’s ability to generate substantial revenue from its foundries.
30.0
20.0
24
20.4
15.0
22
21.7
20.2
19.3 16.7
16.6
10.0
7
5.0
2002
2000
1999
1998
1997
1996
1995
1994
2001
2.9
0.0
1993
ROA (%)
25.0
C. Bodnar
Page 8
Stock Valuation & Modeling
The following analysis and assumptions made for the same were based on information extracted
from the Value Line Investment Survey for Intel.
Required return
The required rate of return on an investment in INTC can be approximated by using the
Company’s cost of equity calculated by the CAPM  K e  R f   ( Rm  R f )
Rf
3.5%
Rm
7.5%

1.35
Therefore, by applying the CAPM, the required rate of return on INTC is:
K e  3.5  1.35(7.5  3.5)  8.9%
Growth
By multiplying INTC’s ROE by its the retention
5yr
10yr
rate (b), we are able to estimating the company’s
ROE
17.4%
23.7%
growth rate. A growth rate of 15.96% is assumed.
DPO
10.6
6.9
b (1-DPO)
89.4
93.6
g  ROE  b
15.96% 22.5%
Gordon Constant Dividend Growth Model
Since Ke < g, this model can not be used. A multi period dividend discount model is more
appropriate for INTC.
C. Bodnar
Page 9
Multi Period Discount Model based on Dividends:
Assumptions:
Years Supernormal Growth:
@ growth rate g1:
5
15.96%
Required Return (Disc.Rate):
8.9%
Normal growth beg. in year 6 (g2):
5.0%
Disc.Rate during normal growth:
8.9%
INTC’s T0 dividend is $.10 per share.
1. Compound dividends in yr.1-5
at the growth rate and discount
each back to the present.
2. Compound yr. 5 dividend by
the normal growth rate and
discount it back one period at
D6
Ke-g 
to find the
Ke  gn
price of the stock in year 5.
3. Discount the price back to the
present.
This method yields an intrinsic INTC value of $4.12
Multi Period Discount Model based on Earnings:
The intrinsic value based on dividends does not properly value the stock. Since Intel’s
average plowback ratio is over 90%, discounted earnings would be a better proxy for the
value of the firm.
Employing the same methodology as the multi period discount model (above) substituting
earnings for dividends yields:
Intrinsic INTC Value of $32.19
Value Implied by PE Ratio:
5yr
INTC Average PE:
T1 Earnings (2004)
Since
P
 Price
E
40.5x
$1.00/share
then PE  EPS  Price  40.5  $1.00 
INTC Value of $40.50
C. Bodnar
Page 10
Intel Corporation
(INTC:NASDQ)
Market Quote (12/11/03):
Multi-Pd. Discounted Earnings:
Implied PE Ratio:
Value
$30.91
32.19
40.50
Intel’s valuation based on the PE method is approx. 25% higher than the implied value in the PE
Ratio. This is primarily the result of the exorbitant growth rate(s) baked into PE ratios dating
back to 1999; a time in hindsight when the market was considered to be severely overvalued.
Additionally, Value Line's one-year EPS growth estimate is slightly higher than the one assumed
to discount earnings.
PE Model:
The PE Model would not be used in this analysis because the required rate of return (Ke of
8.9%) is less than the stock's expected growth rate of 15.96%. This produces a negative
number in the denominator of the equation: P0 
E1 ( DPR )
kg
ValuePro.net Model:
The Valuepro.net model is a proprietary software package that makes certain assumptions
about the company to project future free cash flow and a terminal value and discounts them
at the firm’s WACC. Some of the assumptions Valuepro.net used to arrive at its price are
as follows:
Period
Growth Rate
WACC
5 yrs
15.96%
8.88% 1
The WACC closely resembles the calculated
required rate of return on Intel (Ke= 8.90%).
This is positive given the fact that Intel has
very little debt in its capital structure and the
cost of debt would have only a marginal effect
on the overall cost of capital.
1
INTC Value of $13.23
C. Bodnar
Page 11
Conclusion
The current market price of the stock is approximately $30 per share. Since Intel is a growth
stock in a technology sector, the street is valuing the future earnings potential of the company.
As such, the multi stage earnings growth model that values the Company at approximately $32
per share gives substance to a BUY recommendation on Intel at its current level.
Other analysts providing coverage:
ANALYST
CSFB
Banc of America
Argus
Standard & Poors
RECOMMENDS
Buy
Buy
Buy
Buy
12 MO. PRICE TARGET
34.50
32.00
38.00
45.00
C. Bodnar
Page 12
Risk Factors
NON-SYSTEMATIC
The following are major risks that INTC faces as a company:
Manufacturing Risk. Intel owns and operates manufacturing facilities around the world, which
create large fixed costs. These facilities are a competitive advantage during boom cycles
and weigh significantly on operating leverage during recoveries. They represent a drain
on earnings and cash flow in downturns. In addition, the escalating costs and revenue
requirements for building an advanced semiconductor fabrication facility are becoming
prohibitive for most semiconductor companies. Roughly 70% of INTC’s manufacturing
occurs in its U.S. facilities, while the remaining 30% of its manufacturing takes place at
its facilities in Israel and Ireland.
Technology Risk. INTC is at risk of introducing a step-function technology into the marketplace.
This could render many or all of Intel's technologies obsolete.
Key Talent Risk. The Company’s business model is built upon continuous innovation. A loss of
key employees could hurt INTC’s long-term prospects.
Product Risk. INTC has focused its products on several high-volume end-markets (e.g., PCs and
wireless handsets). While the end markets have proven to be successful growth markets
over the last decade, there is always the risk of a lack of growth due to competing
applications or other product fads.
Customer Risk. The Company derives the majority of its revenue from the large PC OEMs such
as Dell, Hewlett Packard, and IBM etc. Material problems for those companies could
result in material risk to INTC’s revenue and/or profitability as well.
Warranties. INTC often sells its products with warranties against defects that could have a
material impact on Intel's earnings. Given the increasing complexity and volume of the
products produced by Intel, this is a material risk.
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RISK FACTORS (Cont’d)
INDUSTRY SPECIFIC
The major industry-specific risks that INTC faces include:
Economy. While the overall global economy appears to be improving, uncertainty still remains.
Since product cycles and other cyclical dynamics are typically large drivers of
semiconductor growth, a weaker-than-expected global economic pickup could negatively
impact the sector.
Inventory Cycle. Since the semiconductor industry is cyclical in nature, semiconductor
companies are prone to periods of excess inventory and periods of inventory shortages.
Such swings can have a dramatic impact on semiconductor companies relative to
fundamental trends in the broader marketplace.
Product cycle. The semiconductor industry does not currently have a clear product driver. The
industry is no longer a single-product (i.e., PC) industry, which means there could be
breakouts and recoveries in specific sectors and not the industry as a whole.
Slowing end user demand. The industry’s two largest end markets are computing and
communications. Without innovation, replacement cycles may remain weak and growth
could be uncharacteristically slow.
Value add. During the PC era of semiconductor growth, much of the value add came from the
semiconductor companies. Accordingly, profitability for the industry in the 1990s was
materially higher than the 1980s. As the industry growth shifts from the corporate PC
driven growth to more consumer computing, consumer devices, and communications
devices, it’s likely that semiconductor companies will not be the key differentiator of the
products. Therefore, there is risk in the fact that the value add, and corresponding
profitability, may shift from the semiconductor supplier to the equipment manufacturer.
C. Bodnar
Page 14