Intel Corporation
(NASDAQ : INTC)
Stock Report | Student Managed Fund
February 9, 2004
Chris Bodnar
MBA Candidate
May 2004
BUSINESS SUMMARY: HEADQUARTERS:
Intel Corp is one of the world's largest semiconductor chip makers, supplying
the computing and communications industries. Products supplied to these Intel Corporation
industries by Intel include microprocessors, chipsets, network processor
chips, embedded control chips, and flash memory used in cellular handsets 2200 Mission College Blvd.
and handheld computing devices. Board level products include Ethernet Santa Clara, CA 95052-8119
network interface cards and complete PC motherboards for OEMs. End
www.intc.com
markets for Intel products include Personal Computers (PCs), servers, and
networking and communications equipment.
Symbol: INTC Date: 2/9/04 PE (TTM): 35.93 x GICS SECTOR:
Market: NASDAQ NM Price: $30.57 Fwd PE (5y): 24.2 x Information Technology
Employees: 86,100 Div. Yield: .52% PEG: 1.6 SUBINDUSTRY:
OS Shares: 6,532 mil. 52 Wk-H: $34.60 (5y) 2.04 Semiconductors
Mkt Cap: $199.7 bil. 52 Wk-L: $14.50 (3y) 6.64%
Peer Subset:
% of High: 98.6% Sharpe ratio: .096
% of Low: 204.5% Treynor Ndx: .027 Adv. Micro Devices AMD
Altera Corp. ALTR
150% Fairchild Semi. FCS
Infineon Technologies IFX
100%
Integrated Device Tech. IDTI
LSI Logic LSI
Cumulative Return
INTC STMicroelectronics STM
50% Xilinx, Inc. XLNX
SOXX
0% S&P
500
-50%
-100%
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
STANDARD & POOR’S Scale Value Line BODNAR RECOMM.: BUY
Date 2/7/04 Date 1/16/04
S&P Opinion Buy Timeliness 3 Valuation Upside to
Stars 5 1 to 5 Safety 3 Model Value Target
Outlook 4+ 1- to 5+ Technical 3 Disc.Earnings: $32.19 5.0%
Fair Value $32.40 Fin. Strength A++ Disc. FCF: 36.94 20.8%
Invest.Quot. 209 0 to 250 Ind. Ranking 10 of 98 DCF 1yr. Fwd.: 42.30 38.4%
12 Mo. Target $45/sh Target High $60/sh
Earn./Div. Rank A D to A+ Target Low $40/sh
S&P Adj. Consensus Buy
No. of Analysts Rptng 47
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.
C. Bodnar 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 Cellular phone base stations
Routers Factory floor automation instruments
Switches Laser printers
C. Bodnar Page 3
INDUSTRY ANALYSIS
The chip industry has historically been subject to intense boom and bust cycles, but in the 1975-
2000 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 long-
term 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. The United States and
Japan 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. Texas Instruments
Motorola Inc. Xilinx Inc.
The following chart shows Intel’s 5-year cumulative weekly returns plotted against the SOXX
and the S&P 500 Indicies:
150%
100%
Cumulative Return
INTC
50%
SOXX
0% S&P
500
-50%
-100%
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
The results of this time series plot can be summarized as follows:
Cumulative PV of $10K invested
Symbol Return (%) 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
$33,726
$28,560
Revenue (Millions of $s)
Revenue (Millions of $s)
$29,389
$26,273 $26,539 $26,764
$695
1998 1999 2000 2001 2002 TTM Peers TTM
INTC’s Y/Y trend in revenue is shown above. The Company’s top line has won it the spot of the
1.8 1.8
1.6 1.6
1.57 1.57
largest market share out of all semiconductor manufacturers in the world. It had captured
1.4 1.4
1.2 1.2
the
$28.6B through 1.1 TTM ending September 30, 2003. The industry average for INTC’s peer
1 1.1
EPS
1
EPS
0.8 0.8
0.91 0.91
group was only $695M for the same period. The 2001 drop-off in revenue is attributable to the
0.6
0.47
0.6
0.47
0.4 0.4
contraction that occurred in the U.S. economy as a result of the burst of the technology bubble.
0.2 0.19
0.2 0.19
0 0
is
The Company1999 on target to grow its Y/Y revenues by 10% at FYE 2003.
1998 2000 2001 2002 1998 1999 2000 2001 2002
Earnings
1.8 0.8
0.69
1.6 0.7
1.57
1.4 0.6
1.2
0.5
1 1.1
EPS
EPS
0.4
0.8
0.91 0.3
0.6
0.47
0.4 0.2
0.05
0.2 0.1
0.19
0 0
1998 1999 2000 2001 2002 TTM Peers TTM
contractions beginning in FY 2000 – INTC
The Semiconductor industry has experienced 1.8
1.8
1.6 1.6
1.57 1.57
included. This period mirrored the broader U.S. economic downturn. There are two notable
1.4 1.4
1.2 1.2
observations: INTC’s earnings bounced beginning in FY 2001 and the Company has produced
1 1.1 1 1.1
EPS
EPS
0.8 0.8
0.91
positive 0.91 (Q1 2003 EPS was 0.47
0.6 EPS The
unchanged) for seven consecutive quarters. 0.47 Company
0.6
0.4 0.4
continues to garner the largest share of earnings of the semiconductor market.
0.2 0.2 0.19
0.19
0 0
1998 1999 2000 2001 2002 1998 1999 2000 2001 2002
C. Bodnar Page 6
Profitability
35.0% 20.0%
31.2% 15.0%
30.0%
15.8%
Net Profit Margin
10.0%
Net Profit Margin
25.0%
24.9%
23.1% 5.0%
20.0%
0.0%
15.0%
11.6% -5.0%
Philadelphia Semiconductor Index
10.0%
-10.0%
5.0% -16.7%
4.9% -15.0%
0.0% -20.0%
1998 1999 2000 2001 2002 TTM Peers TTM
INTC’s net profit margin tracks to its earnings.
1.8
1.8 This is indicative of the scalability and
1.6
1.57 1.6
leveragability of Company’s operations to meet demand and contain costs during times of plenty
1.4
1.4
1.57
1.2
1.2
1.1
over its peer group by producing
and1contractions. Once again, INTC demonstrated dominance1.1
EPS
1
EPS
0.8
0.91 0.8
solid net profit margins in contrast to the industry’s losses.
0.6
0.47 0.6
0.91
0.4 0.47
0.4
0.2 0.19 0.2 0.19
0
0
1998 1999 2000 2001 2002
1998 1999 2000 2001 2002
Dividends
$0.10
INTC began paying dividends in 1993. Over the last
DPS ten years, it has grown its dividend at a 25% CAGR.
Yield
$0.08
$0.07
This compares to an 8% CAGR in EPS over the
$0.06
same period. Its annual dividend in 2003 is expected
$0.04
to match the 2002 payout level. The annual yield
0.137% 0.147% 0.235% 0.256%
0.645%
remains low because INTC’s stock value is
1998 1999 2000 2001 2002 relatively high, trading at PE multiples of
1.8 approximately 30x on average
30x over the long run. Intel is only one of a
1.6
1.57 $0.08
1.4
handful of semiconductor companies in the D
1.2
1.1 P Y
1
EPS
industry to pay a dividend. According to Value S L
0.8
0.91 D
0.6
Line, dividends are expected 0.47 grow at
0.4 to
0.2 0.19
approximately 11%-12% over the next five
0
1998 1999 2000 2001 2002
years. $0.01
0.239% 0.097%
TTM Peers TTM
C. Bodnar Page 7
Capital Structure & Leverage
0.40 0.3770 INTC’s balance sheet is strong. The
0.35
0.30 Company is extremely deleveraged in its
0.25
capital structure relative to the industry
D/E
0.20
0.15 average. This contributes to its overall
0.10
0.05 0.0300 0.0294 0.0189 0.0293 0.0262 0.0236 financial strength and lower financial risk
0.00 inherent in the business. Value Line gave
Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 TTM Peers
TTM 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
102.8
TTM period. The Company’s interest coverage 100
Interest Coverage Ratio
80
ratio used to be much larger than it currently is
60
weighed down in recent years by the pattern in 40
revenues. The amount of debt the Company 20
-
carries in its capital structure has remained (5.5)
(20)
fairly constant over the last decade. TTM Peers TTM
0.40 0.3770
0.35
Efficiency 0.30
Intel’s management efficiency can be best shown through an analysis of ROA (see below). Long
0.25
D/E
0.20
term and fixed assets have remained fairly constant over the last decade. Once again, this
0.15
0.10
heavily on 0.0189 0.0293 0.0262 0.0236
demonstrates how the economic downturn that weighed 0.0300 0.0294 the tech sector beginning in
0.05
substantial revenue from its foundries.
FY 2000 affected INTC’s ability to generate 0.00
Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 TTM Peers
TTM
30.0
25.0 22
21.7
20.2
20.0 24
ROA (%)
20.4 19.3 16.7
15.0
16.6
10.0
7
5.0
2.9
0.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
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% Therefore, by applying the CAPM, the required rate of return on INTC is:
Rm 7.5% K e 3.5 1.35(7.5 3.5) 8.9%
1.35
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: INTC’s T0 dividend is $.10 per share.
1. Compound dividends in yr.1-5
Years Supernormal Growth: 5
at the growth rate and discount
@ growth rate g1: 15.96% each back to the present.
2. Compound yr. 5 dividend by
Required Return (Disc.Rate): 8.9% the normal growth rate and
Normal growth beg. in year 6 (g2): 5.0% discount it back one period at
D6
Disc.Rate during normal growth: 8.9% 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: 40.5x
T1 Earnings (2004) $1.00/share
P
Since Price then PE EPS Price 40.5 $1.00
E
INTC Value of $40.50
C. Bodnar Page 10
Intel Corporation
Value
(INTC:NASDQ)
Market Quote (12/11/03): $30.91
Multi-Pd. Discounted Earnings: 32.19
Implied PE Ratio: 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
E1 ( DPR)
number in the denominator of the equation: P0
kg
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:
1
Period 5 yrs The WACC closely resembles the calculated
Growth Rate 15.96% required rate of return on Intel (Ke= 8.90%).
WACC 8.88% 1 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.
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 RECOMMENDS 12 MO. PRICE TARGET
CSFB Buy 34.50
Banc of America Buy 32.00
Argus Buy 38.00
Standard & Poors Buy 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.
C. Bodnar Page 13
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