hey YouTube I'm Jimmy in this video I'm gonna walk through my analysis of the
Intel Corporation ticker symbol INTC this continues our series or we're
analyzing all 30 stocks in the Dow Jones Industrial Average this is the 15th
video in the series we're halfway through and you can see a link to all
the videos in the description below then after we're done with all 30 companies
we're going to go out and try to build three different portfolios a value a
growth and a dividend portfolio Intel's business is broken at the five main
segments their largest segment is the client computing group this segment
targets notebook and desktop markets they recently launched their eighth
generation of Intel's Core processors and the Intel Core X series then we have
the data center segment that segment focuses on products for the cloud and
for communication communication infrastructure this segment has a
potential to keep growing from both artificial intelligence and the cloud
then we have the Internet of Things segment this segment over the past five
years has grown in an average rate of 15% a year which is fantastic this
segment makes up high-performance products for the retail automotive
industrial and other embedded applications this is a rapidly evolving
segment so Intel needs to do what it can to stay ahead of the curve when it comes
to innovation then we have the non-volatile memory Solutions Group and
the programmable solutions group the memory segments they focus on making 3d
NAND flash memory and that's used in solid-state memory devices then they
have the programmable Solutions Group they focus on making programmable
semiconductors and that's used in cars military data centers communications
industrials and so on now Intel has claimed claims that over the past year
this segment both of these segments look to really be picking up speed so that's
a good thing so I've done research on a bunch of different industries and I was
curious to see how Intel was going to stack up from a performance perspective
relative to some of the other companies we've done and I'm not sure if you saw
our recent IBM video we just published a few days ago but I was
surprised to see the slide in revenue that IBM has had
over the past few years so when I got to Intel I was pleasantly surprised that
this chart this is a revenue chart goes back to 2011 and as you could see after
being flat for a few years it looks like revenue is starting to
jump up now these green bars they're estimates but the first three quarters
of 2018 are already closed so this 2018 estimate is really just how will the
fourth quarter add to the first three quarters but now let's look at margins
and as we could see gross profit margins have been a bit all over the place
and although 2018 looks to be better it seems that analyst expectations are
there 2019 gross margins will pull back a bit and when we switch over to net
income margins we can see that what really stands out is the expected jump
in 2018 and 2019 so if things really play out that way well that would really
be nice for earnings per share and perhaps the stock price now when I'm
analyzing a stock I like to look at a few different ratios to see what we can
uncover about the company any information we can see to try to
understand what they do or how they're doing it since we're planning to put
together a dividend portfolio I think it's good that we could start there to
see how that looks so this chart illustrates the trailing 12-month
dividends going all the way back to 2008 and the dividend yield at that time the
current dividend yield is about 2.5 percent that's the red line and that's
tied to the right axis and we also have the blue bars which tell you how much
the dividend actually was we could see that it's about $1.20 over the
past four quarters and we can see that Intel has done a great job of
consistently paying their dividend generally they've raised their dividend
every year and then keep it that way for the full year
the only real exception was right here where they kept it about flat for about
two years so from a dividend perspective they seemed quite reliable now the
question is can they keep it up well one good way to tell is by looking at their
dividend payout ratio ideally we want this ratio to be as low as possible what
this ratio looks at is how much net income how much of net income did intel
payout in the form of dividends now you may notice that in q4 2017
there's no bar at all and this is because intel had a one time loss
according to US GAAP they lost money in that quarter
therefore the dividend they did pay out it was against a negative number so they
put zero here now as an analyst one of the first things I do when I see a one
time loss or gain is to look to see if it's really a one time thing and what's
the story behind it in Intel's case that was related to taxes and a did in fact
look like it was going to be only a one-time hit so as an analyst I would
typically add this number back and had it been a one-time gain while I was I
would have subtracted that number from earnings now that's how you end up with
a chart that looks like this the blue lines are US GAAP and the orange lines
are analyst adjustments and sometimes you can see that analyst adjust things
higher sometimes they just things lower now this brings me to a quick side note
when we switch this chart from net income to revenue we can see that both
analyst adjusted revenue and GAAP revenue are the same and this is true
almost all the time and that's because revenue is very hard to mess with you
either sold something or you didn't and you may hear it called the net revenue
and that they call it net because that's after products are returned so net
revenue accounts for products that are sold to the customer and the customer
keeps them once they return they get deducted from revenue and I think that
this is important because when we switch back to net income we can see how much
net income can be adjusted how much how much it can be messed around with now I
think there's lots of ways from management to move numbers around and I
each time that can have a big impact on things but our job as analysts is to try
to move them back to both make them more comparable to other companies and to get
a truer sense of what profits really look like
that's why generally you'll see me use adjusted earnings now another ratio you
can use to check the efficiency of the business is something called inventory
turnover basically inventory turnover looks at how many times inventory is
sold and replaced over whatever the period or whatever the time period is in
this case it's a year so as we could see the most
recent point is about 3.8 times and the higher the better for this ratio so the
fact that this ratio is declining for Intel tells us that Intel is selling
their products less quickly now another ratio that tells a similar story is
something called the cash conversion cycle this ratio tells us how many days
it takes for the company to convert inventory into cash now technically this
ratio includes inventory receivables and payables so the cash conversion cycle is
basically it says ok intel sold the product Intel collected the receivables
and then they paid their payables how long does it take to convert cash around
the loop again back to cash now I don't want to necessarily hold this rising
cash conversion cycle which is a bad thing by the way and I don't want
necessarily hold it against them and here's why this chart here shows the
breakdown of how cash conversion cycle is calculated the orange bars represent
2017 where the cash conversion cycle was 87 days and the blue bars represent 2014
where the cash conversion cycle was about 51 days so inventory days are up
which tells us that the average days in inventory being held often this can tell
us that management is doing a good or a bad job of predicting whether or not
they're going to be able to sell their inventory so this being up is a bad
thing we want to see does this keep getting worse going forward and how much
worse we don't want management to be too bad at that because we don't them to
have to carry inventory for a long period of time then we have DSO which is
days of sales outstanding this measures how many days it takes the company to
collect the cash from their customers so if this number spikes it could imply
that management is loosening their payment policy maybe they made them pay
in 30 days before now they gave him 60 days well depending on the reason that
this is increasing that could mean something it could tell something about
the business in Intel's case it's only up slightly so I'm not too concerned
with it then for accounts payable turnover
it looks like Intel is paying their payables a bit faster now if you think
about it from a business perspective that's not too bad of a thing but from a
cash conversion cycle it's a negative thing
for the cash conversion cycle ideally what you want is you're barely holding
an inventory you could turn it over super fast you take a long long time to pay
your vendors and they pay you right away all your customers pay you right away
that being said what do we think that Intel's worth and given the business and
the the reliability of their discounted cash flow I think the reliability of
their free cash flow I think that using a discounted cash flow valuation is a
good method to use so for free cash flow we're using analyst estimates and we
have a WACC of nine percent a perpetual growth rate of two point five percent
which I think is a reasonable perpetual growth rate to use and we get a fair
value of about sixty dollars per share now if you're not sure how we came up
with these numbers I have links in the description below to different videos
that we made for this entire process so going back to Intel when we consider
that intel's current price is about forty nine dollars per share our $60
fair value estimate looks pretty good since that sixty dollars is more than
twenty percent away from the current price i think that when we go to put
together our portfolios it's likely that intel appears like it should end up in
the dividend portfolio the value portfolio based on the current price and
maybe the growth portfolio depending on how their efficiency ratios look at that
time i think it's something that we want to we want to monitor because i
don't want it to go too crazy for any extended period of time but what do you
think let me know what you think of intel and if you own intel already or if
you're considering buying it what does your research showing you
that's perhaps different from what our research has shown you do you think it
belongs in our portfolio let me know what you think of the comments below and
don't forget to hit the subscribe button and thanks for sticking with us all the
way to the end of the video and i'll see in the next video thanks