Intel: Are We Getting Ahead Of Ourselves? – Seeking Alpha
With US markets racing to all-time highs, a lot of stocks are at 52-week highs. Some of these names deserve to be at these prices, while others may just be part of the “rising tide lifts all boats” theory. One such name that raced to a 52-week high on Friday was chip giant Intel (INTC). Shares seem to have gotten a bit ahead of themselves at this point, and today, I’ll detail why.
Getting back to tablets for a minute:
In my last Intel article, I detailed how some believed Intel’s tablet strategy was falling behind. Intel seemed to be having a compatibility problem with Android, and a key tech research firm believed that the company would fall well short of its 40 million tablet CPU shipment goal for 2014. Intel has admitted that it fell behind in the mobile revolution, and now the company is playing catch up. It will take a bunch of subsidies, or contra-revenues, to do this. Morgan Stanley believes that the business will need to reach $8 billion to $10 billion a year in sales to become profitable. Last year, that business had just $1.38 billion in sales. Intel’s mobile reporting unit had an operating loss of more than $3.1 billion in 2013. In Q1 2014, according to the earnings release, the unit reported an operating loss of $929 million, up from $703 million in the prior-year period.
Additionally, there are a couple of problems with trying to push into this market too hard. First, if Intel floods the market too much, prices could be depressed and that will increase losses even more. The second problem is that if tablet sales overall (not just those with Intel products) do extremely well, it could come at the cost of the PC business. The PC business is the heart of Intel, accounting for almost two-thirds of the company’s revenues and nearly all of the company’s operating profit when excluding all other segments. Intel has reported two straight years of small revenue declines, while net income and earnings per share have plunged. I’ll discuss current expectations later in this article.
Not as strong of a dividend play:
In some of my previous Intel articles, I had been pitching Intel as a strong dividend play. Despite the fact that Intel has not raised its dividend since 2012, the chip giant has maintained the highest yield when compared to peers such as Microsoft (MSFT), Cisco Systems (CSCO), and Apple (AAPL). Intel looked like a strong dividend play when the yield was in the 3.50% to 3.75% area (or higher), and the 2014 peak daily closing yield was 3.83%. However, with the stock racing to a new 52-week high, that obviously means that the dividend yield is at a 52-week low. The chart below shows Intel’s yield by daily closing price so far in 2014.
At Friday’s close, Intel’s yield was under 3.20%. That yield still leads peers, but not as much as it used to. With Cisco’s dividend raise earlier this year, Cisco’s yield is about 13 basis points behind Intel’s yield. When I discuss stock buybacks in the next section, I’ll detail why this dividend/buyback combination may not be that great anymore for Intel.
Additionally, there is a possibility that Intel does not raise the dividend this year. Intel has been paying out dividends well above its 40% free cash flow target, and free cash flow is expected to drop a bit this year. With Intel paying out 44.5% of free cash flow in 2013, it seems unlikely that a dividend raise will come unless Intel decides to change its strategy regarding the payout target. If free cash flow declines by $1 billion this year, Intel would be at about 50% of its free cash flow for the dividend. Without a dividend raise, Intel could lose its top yield spot to Microsoft later this year, if Microsoft raises its dividend enough. I’ve heard from a number of dividend investors in my articles that are frustrated with Intel’s lack of a raise, and it seems currently that more disappointment is coming.
Buyback – at these levels?
According to the cash flow statement on page 53 of Intel’s 2013 10-K filing, the company spent $2.44 billion in cash to repurchase shares last year. That was down from more than $5 billion in 2012 and $14 billion plus in 2011. With the reduced buyback in 2013, the outstanding share count at the end of 2013 was 4.967 billion, up from 4.944 billion at the end of 2012. So despite nearly $2.5 billion on share repurchases in 2013, the outstanding share count rose by nearly one half of one percent.
In Q1 of 2014, the share count rose even further to 4.972 billion according to the 10-Q filing. Because of this, Intel’s diluted share count rose, and that pressured earnings per share. Intel spent more than $540 million on the buyback in Q1, at an average price of about $24.66. In the year-ago period, the average cost was about $21.15. With shares above those prices for all of Q2, and above $26 for most of the quarter, Intel’s buyback will not be that effective if the company buys back another $550 million or so as it has been doing. If Intel buys back less shares, the outstanding share count will rise even further, and that will hurt EPS. That will also mean that Intel’s total dividend payout will rise, because of more shares outstanding, and that will push the payout ratio even higher. On the other hand, Intel may decide to stop repurchasing shares at these levels, which will take away one bidder in the marketplace and push the share count even higher. If Intel is not buying at these prices, or if the company has significantly slowed down the buyback here, should you be buying?
Intel’s buyback is not that competitive currently. Everyone knows about Apple’s (AAPL) tremendous buyback, which is currently running in the billions per quarter. Apple has gotten its share count down dramatically in recent quarters, and another roughly $45 billion worth of shares is expected to be repurchased from Q2 2014 through the end of 2015. Cisco, which has a market cap that’s about 10% less than Intel’s currently, bought back $2 billion worth of shares in its latest quarter. Microsoft bought back about $1.8 billion in its latest quarter, with a market cap of about 2.5 times that of Intel in recent weeks.
A valuation not justified?
One of the reasons I’m a bit skeptical about Intel’s rise is that it really hasn’t been backed up by results. Intel hasn’t had a spectacular earnings report in a couple of years now. Just look at Apple, for example. In April, Apple announced a blowout earnings report, a huge increase to its buyback, and raised its dividend. Apple also announced a stock split that may help it get into the Dow. Those are actual catalysts we can look at and say that’s why the stock is rising. With Intel, we don’t have anything like that. All there is with Intel is hope that the tablet plan is working, and that PC sales may come in ahead of expectations.
In fact, when you look at current estimates, Intel’s 2014 average revenue estimate has decreased since the Q1 report. The current average is the lowest number I can remember seeing for the 2014 revenue average. You normally would think estimates would be rising with a stock racing to new highs, but that’s not the case here. In fact, the 0.7% expected growth estimate from analysts could be considered optimistic, as Intel has guided to roughly flat revenues this year. Intel may update its yearly forecast at the Q2 report in July, and with the stock where it is currently, investors will basically be banking on a guidance raise. Of course, those investors also were looking for raises in January and April, and that did not happen.
So when you look at the total package that Intel provides, is it really worth it? In the table below, I’ve compared Intel against its large cap tech peers, in terms of growth and valuation for each name’s current and next fiscal year. I’ve also provided dividend yields as of Friday’s close. The link to Intel’s current estimates is above, and from that page you can get to the other names.
*EPS growth and P/E are non-GAAP.
In their current periods, Intel’s valuation is sandwiched between that of Microsoft and Apple, yet Intel offers the worst total package. Additionally, if you were to look at calendar 2014 comparisons, Apple and Microsoft would have even lower valuations. Microsoft and Apple have both made sizable acquisitions recently to help with growth, and both have impressive buybacks. Even though Cisco’s growth right now isn’t great, it is improving. Also, Cisco has a better buyback than Intel, and Cisco’s GAAP valuation is fair as well.
Looking forward to the future period, Intel does not impress. I’d rather pay a little more for Microsoft which comes with a higher level of expected growth and a stronger buyback. I’d certainly buy Apple at a discount to Intel, especially with Apple’s massive buyback and the iPhone 6 coming. With Intel shares running tremendously in recent months, the valuation just does not impress me for the total package you are getting. At more than $28 a share, Intel needs more than flat earnings and sluggish revenue growth in 2014, especially if the dividend isn’t raised and the buyback does not decrease the share count.
Look at the technicals:
Intel shares have risen to the point where two technical items show a pullback may be coming. First, as you’ll see in the chart below, the stock is nearing its upper Bollinger band. This has been a level of resistance for the stock in recent months.
(Source: Yahoo! Finance)
Additionally, the second item I’d like to discuss is in regards to the 50-day moving average. Intel shares have gotten so high that the spread between the stock and the 50-day moving average has increased to more than $1.50. You’ll see two instances of this in the chart below. The first one is in early January, when Intel did not raise its 2014 forecast and the stock sold off. The second instance was in April, before and after earnings, when again investors were not impressed.
(Source: Yahoo! Finance)
If you even go back to November, the spread got above $1.40 going into Intel’s Investor Day, and that’s another time when Intel sold off. Right now, the 50-day moving average is rising, so the spread should start to come down if Intel levels off. With a stock that’s raced this much, you would like to see some sort of a pullback just to improve these technicals a bit. Further upside seems limited, so it is probably a good idea to not chase the stock right now.
Intel shares have recently raced to a new 52-week high, but things may have gotten ahead of themselves. Intel’s results have not justified the recent rally, even if tablet efforts are starting to pay off. At these prices, the dividend isn’t that spectacular, and the buyback’s limited impact is weakened even more. The valuation, compared to other top tech peers, doesn’t justify the package you are getting. The technicals also show a pullback may be coming. If you want to say Intel is a buy at $26 or even $27, that’s fine. But with shares racing above $28, Intel seems a bit expensive here, and a further push towards $29 might prove to be a short opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.