By Brian Nelson, CFA
We said 2016 was going to be a big year for Intel (INTC) and during the past few months, its stock has come roaring back after a sluggish and disappointing start. The company’s second-quarter report, released July 20, won’t help to drive shares to multi-year highs yet (so close!), but the chip-making giant put up some decent numbers (regardless of the media headlines). During the quarter, revenue of $13.5 billion advanced 3% on a year-over-year basis, while GAAP and non-GAAP gross margins in the period exceeded the executive team’s internal targets by nearly a percentage point. Backing out restructuring charges, the company earned $0.59 per share, six cents better than the consensus mark.
The Intel “story” continues to be misunderstood, in our view. The company is growing, and its traction in mobile has been noteworthy, making ongoing gains against rival Qualcomm (QCOM). Intel is also navigating the difficult PC market well, and strength in data center, the Internet of Things and programmable solutions will pave the way for ongoing company-wide expansion. Unlike the IBM’s of the world where revenue is in free-fall, Intel is not struggling, and its purchase of asset-light, free-cash-flow rich Altera was a very savvy move, even though it has strained the balance sheet a bit. By our measures, long- and short-term debt stood at ~$25 billion at the end of the second quarter, slightly higher than the sum of total cash investments and marketable equity securities (~$23 billion). Management said on the conference call that it expects to improve its net cash balance over the second half of the year, however.
Though restructuring charges associated with layoffs muddied accounting earnings, Intel delivered where it matters. The chip giant hauled in $3.8 billion in operating cash flow in the period, more than 3 times what it paid out in dividends, and the company is buying back its undervalued stock hand over fist. We love Intel’s dividend growth potential (it sports a Dividend Cushion ratio of 2.6), and we have no qualms with management scooping up its equity on the cheap. During the quarter, the company repurchased ~26 million shares and still has a whopping ~$7.8 billion remaining dollars authorized for buyback. Our fair value estimate of Intel stands at $42, and any buybacks completed below that level will be value-creating for shareholders, by our tally.
Trading at less than 15 times current-year non-GAAP earnings estimates, Intel is a rare bargain in today’s overheated equity market and has a nice ~3% dividend yield to boot. The company last upped its dividend payout 8%+ in January of this year, and we expect many more years of dividend increases to come. Free cash flow generation at Intel is tremendous, and management aims to please. We’ll be keeping shares of Intel in both newsletter portfolios for the foreseeable future. We think convergence to intrinsic value may happen sooner than later at the company, even if it has a few tough trading sessions following these second-quarter results. It could very well hit multi-year highs before the year is up.