Sunday, April 8, 2012

Time To Buy? Intel?

Well it looks like I may be going to market shortly to make my first purchase of the year.  Who-hoo!  I would be willing to bet that the markets will fall on Monday with the poor employment report that came out on Good Friday.  Likely the March employment report will be an anomaly but who really knows right?

I know it may seem funny for an investor to have not done anything for months, but it really isn't.  Charlie Munger (Buffett's partner) has said, it is best to move like a sloth since investment returns decline as activity increases. Buffett explained this simple concept in his essay on the got-rocks and the had-rocks.  It said that investors would realize the full benefit of the earnings from the companies they own if they sat back and did nothing.  Instead the play the futile game of "outsmart thy neighbor", or in the case of the mutual fund industry they play "keep thy high paying job" game by being smallest relative loser.  Value investors sit back amidst the chaos, waiting patiently for price anomalies, and strike when obvious opportunities arise.  It really isn't rocket science yet most still get caught up in the chaos. 

Anyway back to the stock I am going to buy... Without naming names I will say that the company has been hitting 52 week lows for a while now.   It also sells for approximately 30 times my estimate of Q1 2012 earnings per share on an annualized.  That should make it real easy to figure out, ya right.  The company is currently facing some very significant headwinds in the short term, which is depressing its earnings per share.  I just love it when this type of situation occurs because it gives those with a long term perspective an easy opportunity to profit at the expense of foolish, short-term thinking.

Because I plan on purchasing this stock and will buy substantially more as the price moves lower, it may take a while before I report back on the details.  Once I am completed my purchases I will reveal the name of the company.  I almost feel like a kid at Christmas when a high quality company like this goes on sale at such a ridiculously low price. 

Intel

Because of the tease above I will discuss an actionable investment that has been cheap for a while now (although I liked the price better a few months ago).  Intel was a honorable mention for my top investments for 2011.  Intel is a leading manufacturer of integrated circuits and it's primary product is microprocessors.  Like many other large tech companies they have largely traded sideways for the past decade despite steady underlying sales and earnings growth during that time.  The Price to Earnings (P/E) ratio has fallen from 55 times during the dot com era to the current 10 times earnings.  They have $15 billion in cash on their healthy balance sheet.  They also has a near dominate market position and no doubt you likely own a product that contains an Intel processor. 

I know when many people hear the idea they likely yawn and think they're "too big" to move the needle. 

Perhaps this quote made by the CEO of Intel, Paul Otellini, during the Q4 2010 Conference call will will perk some interest. 

"In 2010, total traffic crossing the internet was roughly 245 exabytes. This is greater than all the previous years combined. Over the next five years, a billion more people will join the global online community with 15 billion new connected devices including PCs, tablets, embedded devices and smart TVs. We estimate this will increase the data footprint across the Internet to over 1,000 exabytes. More people, more devices, more usages."

Now that's something to talk about and it really makes it clear how much room a company like Intel really has to grow.  Let's be honest folk, we are just at a beginning of a revolution technology yet if you asked the average person, they likely feel we've already arrived, how much more can technology change out lives?

Over the next few years we will witness an explosion of new ideas that will radically transform our lives.  Just think of the number of devices that require a microprocessor in your house and whether or not that number will increase or decrease over the next few years.  Good question. 

Now as many readers will know Intel has a dominate market share in the PC computer space.  Many likely don't know how Intel plans to take that to the next level over the next few years. 

Ultrabooks

Due to the success of new thin devices such as the Macbook air, Intel quickly set out to trademark the word "Ultrabook".  An Ultrabook is a ultra thin laptop with extended battery life without compromising performance.  They utilize solid state drives, have very fast boot times, and will eventually feature touch screens.  You can read more about them here: Intel's Ultrabook Site.

These are really game changer for much of the home PC/laptop world of web browsing and social networking.  What I really like is that Windows 8 is just arriving later this year as these devices come to market.  "Win-tel", the nickname given to the Microsoft-Intel duopoly will likely continue its domination. 

Here is what the Intel said about Ultrabooks in the 2011 Annual report: 

Meanwhile, the PC itself is undergoing a renaissance. Last year, Intel led the industry in reinventing the PC experience with the launch of Ultrabook™ systems, a new category of thin, responsive, and secure mobile devices that combine the best features of tablets and notebooks. The first Ultrabook systems, powered by 2nd generation Intel® Core™ processors, were introduced in 2011, and we expect that the industry will bring more than 80 new Ultrabook system designs to market in 2012. 

These devices are just coming to market and 80 new designs are coming out this year.  What I like the best is that all of the device manufacturers (Acer, Dell, HP, etc) pay a royalty to use the Intel "Ultrabook" trademark. 

Smartphones

To date, Intel has been almost non existent in the smart phone processor business.  For example, the Apple iphone utilizes ARM based chips.  Earlier this year, Intel showcased their new smartphones chips and a few manufacturers signed up.  Of notable significance is a multi year contract with Motorola Mobility covering smartphones and tablets, and a joint effort with Google to optimize future releases of the Android platform to use Intel processors.  Motorola Mobility is a division of Google. 

If this area ever took off for Intel, the impact would be very material. 

Internet-Based TV Service Market

This is another area that Intel appears to be investigating but nothing meaningful has been made public.  It was reported in the Wall Street Journal earlier this year.  If successful in creating a "virtual cable operator" it would represent another meaningful profit center if Intel can pull it off. 

Conclusion

Intel appears to be a very modestly price company with some significant growth opportunities going forward with Ultrabooks, smartphones, and Internet-Based service ideas.  We are really at the turning point and as the technology revolution goes global we will see meaningful growth for Intel and other technology companies.  The sheer amount of data crossing the internet is not only mindboggling but will only increase.  This makes Intel an great long term investment idea. 

In 2011, Intel generated $21 billion in cash, invested $10.8 billion in it's business (PP&E up sharply from $5 billion in 2010), paid out $4.1 billion in dividends and the best part, repurchased over 10% of the float for $14.3 billion.   The balance was made up from an increase in debt and a decrease in cash.  Management is screaming that the stock is cheap when they fork over that kind of money to buy back stock. 

Good Decisions. 


Best Regards,
Kevin


Disclosure: Long MSFT, BRK.b (I indirectly own some INTC through Berkshire Hathaway, BRK.b)

P.S. - Anyone else notice that the analyst at Valueline got the shares outstanding incorrect?  It should be 5.0 billion shares outstanding, not 5.581 billion (Click here).  The report is dated April 6th, 2012.  A 581 million share difference shouldn't make any difference going forward, should it???

1 comment:

  1. Hi Kevin,

    Thanks for the great blog.

    I've been thinking about Intel too, but I am concered by the lack of new partnerships for innovative markets. All the talk about futuristic smarter faster chips, is not that impressive. Today they cut sales forecase by 500 M USD for 2013.

    Given that the whole area of Smartphone/Tablet demand is a bit uncertain, and that Intel really need partnerships(preferably Chinese) to even break-in, they seem risky now.

    Do you think it is plausible that can grow in the Tablet/Smartphone market, anytime soon? Won't there be a need for protyping and inevitable delays?

    What I think Intel really need is some great partnerships(perhaps thro their McAfee deal), offering hightened security and speed, for Data. If they could link up wit some Chinese carriers and offer secure devices.... this could be a great break-in and success story. Perhaps device manufacturers would then switchover to Intel chips? But best case, this kind of dreamming is probably be 2-3 yrs away...

    Am I being too bleak? Do you see improvement in their fortunes before then?

    The way I see it, both APPLE and Samsung struggling growth today in this space. So the space is not what it was say 5 years ago. Where they are trying to get into to save themselves, is not even 'durable competitive business' for years to come.

    Given this, unless by some miracle, Intel get something going in the next 12 monthly, I think the chances are they will get smaller and less relevant before they get bigger. So the stock most likely will decline, how far, who knows.

    A bitcoin for your thoughts... :-)

    PS I think the logic above can be applied also to Dell, HP and Microsoft. Would you agree?

    ReplyDelete