On Tuesday, Intel (INTC) put up record third-quarter results. We maintain the firm is one of our best ideas at these levels and are considering adding to our position in the portfolio of our Best Ideas Newsletter. Our $36 fair value estimate, which remains significantly above current levels, is unchanged after the excellent report.
The first sentence of Intel’s press release tells most of the story behind the quarter: “Intel…reported third-quarter results, setting new records for microprocessor units shipped, EPS, earnings and revenue, which was up 28 percent year-over-year.” In fact, it’s difficult to find much not to like in chip giant’s performance during the period. As mentioned above, revenue hit $14.2 billion (an all-time record), operating income hit $4.8 billion (up 16% from the prior year’s quarter and an all-time record), net income reached $3.5 billion (up 17% from last year’s period and an all-time record), and earnings per share hit $0.65 (up 25% and also an all-time quarterly record).
Interestingly and perhaps surprisingly to onlookers, the chip maker indicated that it saw double-digit growth in notebook personal computers. Such performance was not expected broadly by the Street and reinforces our thesis that the PC is not dead (from mobile and tablet competition). Intel also noted strength in its data center group, which advanced 15% in the period, thanks to the proliferation of mobile and cloud computing.
The firm was an absolute cash cow during the period, raking in $6.3 billion in cash from operations, which it handed for the most part back to shareholders in the form of buybacks and cash dividends. Cash on the balance sheet increased by a staggering $3.7 billion in the third quarter to about $15.2 billion. Even after the expensive purchase of McAfee last year, and over $1 billion in dividends, Intel is reloaded with cash, and can pursue both organic growth and acquisitions. The firm’s board also approved an increase in its share repurchase program by $10 billion, to $14.2 billion at the end of the quarter. Given that Intel’s share price is significantly undervalued, we’re huge fans of this buyback program and management’s general capital allocation plans.
Aside from posting impressive numbers, and retaining its relatively bullish outlook on global PC sales, Intel provided some information on their 3-D processors that will ship in spring 2012, and the strength of the McAfee integration. In our last note to investors, we argued that adding the security company’s revenue mix would be accretive to earnings and ultimately gross margins, which appears to be the case.
Intel’s outlook for the remainder of the year was just as strong as its most recently reported results, guiding this quarter’s revenue to $14.7 billion, which beat most analysts’ expectations. Overall, we think the firm remains significantly undervalued at today’s prices, and we think the large buyback and dividend will only help Intel outperform the broader market.