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Intel Is Well-Positioned to Ride Out the Storm

publication date: Apr 27, 2020
author/source: Callum Turcan

Image Source: Intel Corporation – January 2020 CES Presentation

By Callum Turcan

Intel Corporation (INTC) reported first-quarter earnings for fiscal 2020 (period ended March 28, 2020) that beat both consensus top- and bottom-line estimates; however, guidance for the fiscal second quarter was softer than expected and shares of INTC initially sold off on the report. However, there’s a lot to like in the update, and we continue to like shares of Intel as a holding in both the Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Intel is very well-positioned to ride out the storm caused by the ongoing coronavirus (‘COVID-19’) pandemic, and shares of INTC yield ~2.3% as of this writing.

Balance Sheet Strength

The firm had $20.8 billion in cash and cash-like investments (cash and cash equivalents, short-term investments, and trading assets) along with $3.9 billion in equity investments and $2.9 billion in other long-term investments at the end of its fiscal first quarter, versus $3.5 billion in short-term debt and $36.5 billion in long-term debt, providing Intel will a strong liquidity position and manageable net debt load.

Last fiscal quarter, Intel tapped debt markets to raise long-term funds to better withstand these challenging times. On March 25, Intel issued $1.5 billion in 3.400% Senior Notes due 2025, $1.0 billion in 3.750% Senior Notes due 2027, $1.0 billion in 3.900% Senior Notes due 2030, $0.75 billion in 4.600% Senior Notes due 2040, $2.25 billion in 4.750% Senior Notes due 2050, and $1.0 billion in 4.950% Senior Notes due 2060. Intel retains quality access to debt markets at attractive rates, and now carries a prime liquidity position. At the end of its fiscal first quarter, Intel’s current ratio was north of 1.7x.

Intel generated $6.2 billion in net operating cash flow last fiscal quarter while spending $3.3 billion on capital expenditures, allowing for $2.9 billion in free cash flow. That fully covered $1.4 billion in dividend payments during this period; however, $4.2 billion in share repurchases were partially covered by the balance sheet.

Management has since suspended Intel’s share repurchasing program, which we view as prudent given the need to preserve cash on hand and considering shares of INTC are trading near the upper end of their fair value estimate range (the top end of the range sits at $61 per share) as of this writing. Additionally, Intel is selling its Home Gateway Platform Division for $0.15 billion to MaxLinear Inc (MXL) in an all-cash deal that was announced back on April 6, and the press release noted that “[t]he Home Gateway Platform Division comprises Wi-Fi Access Points, Ethernet and Home Gateway SoC products deployed across operator and retail markets” which doesn’t represent a core part of Intel’s business strategy.

Guidance and Operational Update

While Intel offered soft guidance for the fiscal second quarter (which we’ll cover in a moment), its long-term growth trajectory remains sound. Due to surging data demand, Intel reported that its ‘Data Center Group’ revenues were up 43% year-over-year last fiscal quarter, hitting $7.0 billion and that growth rate was supported by 53% year-over-year revenue growth at its cloud service provider segment. Intel’s PC-centric business revenue, reported as its ‘Client Computing Group’ (‘CGG’), saw its revenue rise by 14% year-over-year to $9.8 billion last fiscal quarter due in large part to the work-at-home dynamic that has gripped large parts of the world (creating a greater need for laptops and desktops at many household’s homes for employment needs). On a GAAP basis, Intel’s revenues rose by over 23% year-over-year in the fiscal first quarter, hitting $19.8 billion. Intel forecasts that in the fiscal second quarter, its GAAP revenues will come in at $18.5 billion.

On a GAAP EPS basis, the firm reported $1.31 in diluted EPS (up almost 51% year-over-year) last fiscal quarter, and for the second fiscal quarter, Intel expects to earn $1.04 in GAAP EPS. That EPS growth was assisted by meaningful share buybacks (Intel’s outstanding weighted-average shares outstanding fell by almost 6% year-over-year last fiscal quarter). Intel’s GAAP operating income surged by almost 69% year-over-year last fiscal quarter, reaching over $7.0 billion, as the firm benefited from strong top-line growth and modest reductions in operating expenses (not including modest restructuring and other charges). Please note that management reported that the firm was no longer providing full fiscal year guidance given rising uncertainties in the macroeconomic environment.

While parts of Intel’s businesses are doing quite well, other parts, like its ‘Mobileye’ segment that caters to the automotive space (we covered the long-term trajectory of Intel’s Mobileye segment back in January 2020 through this article here), are facing the pressures from the slowing global economy. In particular, expectations are for materially reduced auto sales going forward as Mobileye’s segment revenues were up 22% year-over-year last fiscal quarter, hitting roughly $0.25 billion. Here’s what management had to say during Intel’s latest quarterly conference call:

“Moving to the full year. With limited visibility due to the uncertainty driven by COVID-19, we are not guiding the full year. However, I do want to spend a few minutes discussing the expected headwinds and tailwinds we are monitoring and our response to the market dynamics. Tailwinds are most evident in the first half of the year on strong demand for mobile compute and related infrastructure on the dynamics of sheltering in place.

In particular, mobile PCs, cloud and network infrastructure for 5G remain above seasonal trends. Headwinds include the impact of a global recession on IOTG [Internet of Things] end markets, particularly industrial and retail, lower automotive production impacting Mobileye and slowing enterprise and government data center demand. We also expect the PC TAM [total addressable market] to weaken in the second half as GDP effects outweigh the initial demand bump from COVID.”

It appears that Intel is expecting the negative impact of a slowing global economy to put a brake on many of its segments' growth trajectories in the near term; however, there are still opportunities for growth out there as the ongoing pandemic is forcing both public and private entities to get creative in order to handle the crisis. Here’s another key excerpt from management during Intel’s latest quarterly conference call (emphasis added):

“Through this crisis, the world’s cloud and network infrastructure has delivered massive scaling to support vital workloads for businesses and consumers. Cloud-delivered applications seen as conveniences a quarter ago, such as online shopping and video collaboration, have now become indispensable. We scaled our cloud and communication service provider businesses by 53% and 33% year-over-year, respectively, to help our customers meet these growing needs. These two segments now drive 70% of our data center segment revenue.

New usages and market needs are also pushing compute resources closer to the data source or point-of-service delivery, giving rise to an increasingly intelligent edge. Our edge business delivers a wide range of platforms, including some innovative solutions that are helping the medical community tackle COVID-19.

One example is Medical Informatics’ Sickbay platform [Medical Informatics is an affiliate of Intel’s Intel IoT Solutions Alliance group]. Powered by Intel technology, this solution can turn beds into virtual ICU beds in minutes, helping protect critical health care workers while expanding their care capacity significantly.Houston Methodist Hospital deployed Sickbay for its virtual ICU and was able to leverage it within one day to support remote monitoring of its COVID-19 patients without risking exposure to care providers.”

Whether it is supporting the computing power of much needed-data centers or enabling the healthcare solutions of the future, Intel is ready to rise to the opportunity. Major R&D investments have allowed Intel to innovate and stay ahead of the curve in this hypercompetitive and complex space.

Concluding Thoughts

Headwinds are building, but Intel retains the balance sheet strength required to ride out COVID-19 and is well-positioned to cater to the industries of the future once the storm passes (5G, cloud computing, semi-autonomous and autonomous driving, the Internet of Things, and more). We continue to like shares of INTC as a holding in both the Best Ideas Newsletter and Dividend Growth Newsletter portfolios, and the strength of its cash flow profile, business model, and balance sheet should allow Intel to keep its dividend policy intact during the pandemic. Intel’s Dividend Cushion ratio sits at 2.1, earning the firm a “GOOD” Dividend Safety rating, and we view Intel’s Dividend Growth rating as “EXCELLENT” given the firm’s promising long-term growth trajectory.


Communications Equipment Industry – CSCO JNPR KN NOK SMCI

Broad Line Semiconductor Industry – AMD AVGO FSLR INTC TXN

Integrated Circuits Industry – ADI MCHP MRVL NVDA SWKS TSM XLNX

Semiconductor Equipment Industry – AMAT CREE IPGP KLAC LRCX MKSI SNPS TER

Related: MXL, SMH


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Callum Turcan does not own shares in any of the securities mentioned above. Cisco Systems Inc (CSCO) and Intel Corporation (INTC) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio and Dividend Growth 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.

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