(updated July 13 6:21 a.m. est)
Intel Corporation (INTC) will release its financial results after the US financial markets close.
We spotlight INTC due to its consistent ability to produce free cash flows and strong credit, both of which manifest in a below-market cost of equity capital. INTC is, by Credit Trends, rated “A” for both cash flow and debt, as seen below.
While the model has picked up some deterioration of its credit quality over the past year (operating cash flow adjusted for working capital changes, leases, total debt, ratio of working capital to total debt, pensions, inventory/sales, reinvestment, taxes, others), INTC remains a very strong credit, and is thus accorded our highest rated class.
The table below shows INTC could free up additional free cash flows by reducing its selling, general and administrative expense more in line with its rate of growth. Interestingly, INTC has done this with its R&D even though R&D as a percentage of both sales and cost of sales has declined. This was due to the absolute expense reduction in nominal dollars during its past fiscal year of approximately $100MM. This was quite close to the $91 MM we calculated as corporate “fat” we called for a year ago.
INTC is a low tax rate payer by any measure, but in a higher rate (on a cash basis) and more importantly, a more consistent rate than AMD or TXN. In “Security Valuation and Risk Analysis” we show how taxes should be analyzed for areas of weakness and strength, including its role as a leading indicator. In its last fiscal year, INTC was in a 16.5% cash rate versus the 23.4% rate reported to shareholders. By contrast, AMD was in a 3.4% cash rate and TXN a 16.4% rate. Over the past 6 years INTC’s cash tax rate has averaged 6 percentage points higher than TXN.
As for fair value, given its estimated 7% rise in long-term free cash flows and low cost of capital, INTC is currently about 13% undervalued.
Date Source: Research Insights, CT Capital LLC
Kenneth S. Hackel
CT Capital LLC
INTC has risk and should not wish to be considered by certain investors-consult your investment professional.
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