Since the beginning of the year shares of Intel Corporation (NASDAQ:INTC), the world leading PC processor maker, have increased by 4.7%. In comparison, the NASDAQ index has increased by 7.8% (YTD). The moderate rally of the company shows that Intel is slowly regaining back the confidence of investors even though it keeps under-performing the market. Moreover, the recent fall in its credit default swap price or CDS is another indication of a rise in the company’s vote of confidence. Intel isn’t out of the woods just yet, but you shouldn’t rule out this company. Let’s examine why.
During 2013 (year-to-date) shares of Intel Corporation (NASDAQ:INTC) have under-performed not only the NASDAQ index, but also other leading semiconductor companies such as ARM Holdings plc (ADR) (NASDAQ:ARMH) or Texas Instruments Incorporated (NASDAQ:TXN): shares of ARM rose by over 10%; shares of Texas Instruments by more than 14%. So Intel is under-performing in the stock market; how is the company doing in terms of growth?
Growth and profitability
During 2012 Intel didn’t perform well in terms of growth as its revenue fell 1.2%. The company’s operating profitability declined to 27%. ARM Holdings plc (ADR) (NASDAQ:ARMH), on the other hand, augmented its profit margin to 36%. Despite the drop in profitability, Intel Corporation (NASDAQ:INTC) is still in the middle of the pack in terms of profitability. Moreover, according to the company’s expectations, Intel is expected to increase its revenue by a single digit percentage. If it will be able to show growth in revenue, this could also lead to a rise in profit margins.
When breaking down Intel’s profit centers, the segment that grew the most in 2012 was the software and services operating segment – its revenue grew by more than 27% in 2012 compared to 2011. The segment that fell the most in 2012 was the products used for mobile and tablets that contracted by 12.5%. The PC and Data Center segments were the most profitable at 38% and 47%, respectively. Further, the most profitable segment – Data Center – grew by 6% in 2012. If this segment, which is also the second largest segment in terms of revenue, will continue to rise as it did in 2012, the company’s profitability will likely to rise.
Intel and CDS
Intel Corporation (NASDAQ:INTC)’s credit default swap (five years, in USD) has declined in recent weeks: it has decreased from nearly 73 back in November 2012 to nearly 56 as of the beginning of February. This represents a drop of 23%. The current price means the annual premium is $56 thousand in case of a default of $10 million of debt within the next five years. The chart below presents the developments of the five year CDS price between 2011 and 2013 (weekly prices).
The decline in the company’s CDS suggests the market estimates a lower probability of default than during the end of last year. Moreover, the recent rally in the company’s stock price may have also contributed to the decline in CDS.
Dividend & payout
In terms of dividend, Intel is offering a much higher dividend yield than its major competitors: the company pays a $0.225 quarterly dividend, which comes to 4.16% annual yield. In comparison, Texas Instruments Incorporated (NASDAQ:TXN) pays $0.28 per share, which comes to 3.17% annual yield; ARM Holdings plc (ADR) (NASDAQ:ARMH) only offers a $0.13 dividend, which comes to a 0.51% yearly divided yield. Intel Corporation (NASDAQ:INTC), much like Texas Instruments, increased its payout ratio in 2012. Intel is also in the middle of the pack on this ratio (see chart below).
Finally, both Intel and Texas Instruments are buying back their respective shares. These factors mean that investors of these companies are getting back their investment faster than ARM investors do.
Rise in R&D
In terms of R&D Intel expanded this provision by more than 21% during last year. Its competitors have also augmented their R&D provision during 2012: Texas Instruments Incorporated (NASDAQ:TXN) by more than 9% and ARM Holdings plc (ADR) (NASDAQ:ARMH) by only 4%. On the other hand, Intel Corporation (NASDAQ:INTC) was in the middle of the pack in terms of R&D as percentage of revenue at 19% in 2012. The chart below shows the developments of this ratio in recent years and a comparison to other chip companies.
Thus, Intel still has a long way to go until it will reach the same level as ARM Holdings in terms of R&D as percentage of revenue.
In 2013 Intel projects its R&D and G&A will reach around $18.9 billion – this represents almost 4% gain compared to 2012. Assuming the company’s ratio of R&D to G&A will remain in 2013 as in 2012; the R&D provision will rise by 4% and could reach $10.5 billion during the year. If the company will keep raising its R&D budget this could eventually lead to new products and growth in revenue.
The Foolish bottom line
Despite the slow year Intel Corporation (NASDAQ:INTC) just had, it still has the capabilities to produce not only growth but also a high profit margin. The company’s rise in R&D could eventually lead to a rise in this company’s revenue in the near future, which will put it back on track. In the meantime, the company is continuing to share the profits with its investors by its buyback program, high yield, and high payout ratio.
The article Don’t Rule Out Intel Just Yet originally appeared on Fool.com and is written by Lior Cohen.
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