Image Shown: Shares of Intel Corporation leapt higher on Friday October 25 as the market digested its solid earnings report and guidance for this quarter.
By Callum Turcan
Intel
One of our favorite Dividend Growth Newsletter and Best Ideas Newsletter portfolios holdings, Intel Corporation (INTC), posted third quarter fiscal 2019 earnings (period ended September 28) on October 24 that handily beat consensus top and bottom line estimates. Revenue in the third quarter on a GAAP basis came in at $19.2 billion, flat year-over-year, which management noted was $1.2 billion higher than guidance issued out in July. This outperformance was driven by Intel’s ‘data-centric’ offerings, with sales up 6% year-over-year, as Intel Xeon processors for data centers sold well. Additionally, Intel shipped its first 10-nm based Agilex Intel FGPAs (field-programmable gate array) last fiscal quarter (a system-on-chip offering that can be modified post-manufacturing by the end user for their specific needs in the networking and data center space).
Going forward, Intel expects its GAAP revenues to be flat sequentially in the fourth quarter of fiscal 2019. For the full fiscal year, Intel is guiding for $32.0 billion in cash from operations and $16.0 billion in capital expenditures, good for $16.0 billion in estimated free cash flows. Management approved a $20.0 billion increase in Intel’s share buyback program this earnings cycle, and it’s worth keeping in mind Intel’s outstanding diluted share count was down more than 6% year-over-year in the third quarter of fiscal 2019.
During the first three quarters of fiscal 2019, Intel generated $11.7 billion in free cash flow. Roughly $4.2 billion was spent on the firm’s dividend payouts and $10.1 billion was allocated towards share repurchases during this period. As of September 28, 2019, Intel’s net debt load stood at $16.9 billion, but please note its cash hoard stood at a little over $12.0 billion, providing the firm with extensive liquidity.
In order to preserve Intel’s financial position during a turbulent time for semiconductor companies, management scaled back the firm’s operating expenses. During the first three quarters of fiscal 2019, Intel reduced its R&D and MG&A expenses by 5% year-over-year. That wasn’t enough to offset the 11% year-over-year decline in Intel’s GAAP operating income during this period, a product of declining gross margins and smaller revenues, but we appreciate Intel adjusting its cost structure as market conditions dictate.
Investors were relieved that things weren’t as bad as feared this quarter, given trade war headwinds and weaker demand from major data center operators. The top end of our fair value estimate range for INTC stands at $61 per share.
Visa
Visa Inc (V) is one of our favorite holdings in our Best Ideas Newsletter portfolio, and the payment processor reported fourth quarter earnings for fiscal 2019 (period ended September 30) on October 24. The company beat both top and bottom line estimates while issuing out promising guidance for fiscal 2020, guidance that effectively communicated to the market Visa’s growth trajectory will continue, foreign currency headwinds and slowing global economic growth aside. Payment volumes were up 9% in fiscal 2019 on an annual basis, helping drive Visa’s GAAP net revenues higher by 11% year-over-year to $23.0 billion and its GAAP operating income higher by 16% year-over-year to $15.0 billion. GAAP diluted EPS was up 20% year-over-year to $5.32 in fiscal 2019.
At the end of September 2019, Visa was sitting on $7.8 billion in cash and cash equivalents, $1.2 billion in restricted cash for US litigation escrow, $4.2 billion in investment securities, no short-term debt, and $16.7 billion in long-term debt. Putting restricted cash aside as that’s for covering legal liabilities, Visa’s net debt stood load stood at $4.7 billion at the end of its fiscal 2019. For comparison, Visa’s market capitalization is quickly approaching $400.0 billion as of this writing.
Visa generated $12.8 billion in net operating cash flows while spending just $0.8 billion on capital expenditures in fiscal 2019, allowing for $12.0 billion in free cash flows. That easily covered $2.3 billion in dividend payments, with the remainder going towards $8.6 billion in Class A share repurchases. From fiscal 2018 to fiscal 2019, the number of diluted weighted-average outstanding Class A Visa shares fell by ~2.5%. While Visa could allocate significantly more free cash flows towards dividend payments versus share buybacks, please note our fair value estimate for V stands at $182 per share with the top end of our fair value estimate range sitting at $218 per share. Share buybacks at significant discounts to their intrinsic value can be a solid way to enhance shareholder returns.
Going forward, Visa expects to generate low double-digit GAAP revenue growth and mid-single-digit GAAP operating expense growth in fiscal 2020 on an annual basis, allowing for mid-teen annual GAAP EPS growth on a diluted basis. Visa expects foreign currency headwinds will come in at 100-150 basis points in fiscal 2020, which are already reflected in the aforementioned forecasts, due to the strong US dollar.
Concluding Thoughts
We continue to really like Intel in our Dividend Growth Newsletter and Best Ideas Newsletter portfolios, and Visa in our Best Ideas Newsletter portfolio. The share price action seen in shares of INTC and V on Friday October 25 seem to indicate the market really appreciated each company’s latest earnings report, with shares of both companies marching higher as of this writing.
Broad Line Semiconductor Industry – AMD AVGO FSLR INTC TXN
Integrated Circuits Industry – ADI MCHP MRVL NVDA SWKS TSM XLNX
Software Security Industry – CHKP FEYE IMPV PANW PFPT SYMC VRSN
Financial Tech Services Industry – ACIW EPAY FDC FIS FISV FLT GPN MA MELI PYPL V VRSK WU WEX
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Callum Turcan owns shares of Visa Inc (V). Intel Corporation (INTC) is included in both Valuentum’s simulated Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Visa and PayPal Holdings Inc (PYPL) are both included in Valuentum’s Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.