The company of the week this week is Intel Corporation (INTC), the semiconductor chip maker whose products are the building blocks for computers, servers, and networking communication devices. As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review. We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.
Business & Management Review
1. Is the business simple and understandable?
For Intel, this depends on what part of the business you want to understand. The actual design and construction of semiconductor chips is an extremely complex realm to be involved in, but since Intel has qualified employees, we do not believe it is necessary for the investor to understand the process himself (or herself). While it would certainly be beneficial to know how to do it, investors should instead focus on the overall business plan of the company.
The company designs the chips that form the “brains” of countless technological devices. The devices themselves are often designed and created by other firms, but that cements Intel’s role as a part manufacturer. It may be easier for some investors to think of computers and semiconductors in a way similar to automobiles. Intel creates the transmission and provides the product to a number of companies who design their own makes and models.
2. Does the business have a consistent operating history?
Intel has been operating in the semiconductor business since its inception in 1968. A glance through the company’s timeline reveals a consistent history of being innovative. It seems every year or two Intel has introduced a new product that is the first of its kind. The company has paid a dividend consistently for over 10 years, and has reported 18 consecutive years of positive net income.
3. Does the business have favorable long-term prospects?
Though the company is facing increased competition from Advanced Micro Devices Inc (AMD), Intel is still finding ways to grow. The last 10 years have seen rapid growth in their international operations. The company has also developed one of the strongest brands in the world. According to Business Week, the Intel name is the 5th most valuable brand name. Coupled with the company’s dominance in their industry, we believe Intel to have developed a very distinguished franchise situation that leads to favorable long-term prospects.
4. Is management rational?
We believe management to be rational. It is important for management of the company to focus on long-term efforts to maximize shareholder return, rather than focus on keeping the stock price high in the short-term. This is a task that the management at Intel takes to another level. The management is consistently outlining future plans for the company (see Platform 2015), and targeting certain production levels and technology innovations. This is a rational view of the business world. When management fails to look forward and instead focuses on the present entirely, there is cause for concern. Intel’s management appears to be focused on long-term actions.
5. Is management candid with its shareholders?
Intel has one of the best investor relations websites we have seen. On the site, one can read executive biographies, executive speeches, historical information, financial information, etc. The company provides an extensive amount of information. The only thing that could be improved is the navigation. We often clicked to view something specific and then couldn’t figure out how to return to where we came from.
6. Does management resist the institutional imperative?
Intel is an innovator in their field, has been for almost 40 years, and will likely continue to be one going forward. We are particularly interested in the company’s social responsibility efforts and their contributions to education. The company has been contributing to educational efforts its entire history, and has contributed a total of over $1 billion. While this may appear to dilute the earnings for shareholders, we believe it is an example of the management resisting the institutional imperative and continuing to focus on the long-term. A better educational system improves the outlook for Intel’s hiring practices in the future.
Financial and Value Review
Upon our review, we find Intel Corporation to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not suitable for the defensive investor. The company has not increased earnings per share by at least 33% over the last 10 years, and has a price to book ratio that is too high for the defensive investor. However, we find the company to have a PE ratio of 19.13, and a return on invested capital of 20.65%. In addition, we like Intel’s current ratio, dividend history, and profitability history.
We believe the company has potential to reach $23/share in the next few years.