DRIP PORTFOLIO

The Drip Portfolio
Intel's Third Quarter
A solid long-term showing

By Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Oct. 12, 1999) -- After the market closed, Intel (Nasdaq: INTC) announced third quarter results. Revenue rose 8.9% from last year to $7.33 billion, while earnings per share (EPS) before one-time charges rose 22% to $0.55. As happened in the second quarter reported in July, Intel's EPS fell short of consensus estimates by two cents.

More important, however, will be the company's forward guidance in the conference call, which was scheduled to begin late this afternoon. In the second quarter, Intel's shares rose during the weeks following its EPS shortfall because management shared enthusiasm for the second half of the year.

Generally, the positive sentiment wasn't misplaced. The company shipped record volume of CPUs this quarter as demand for Personal Computers continued to rise and prices for the boxes continued to decline. With falling PC prices, however, Intel's average selling price (ASP) per chip sold dipped again even though some Intel watchers expected ASPs to rise. The company's product mix -- it is selling more high-end chips while reducing the cost of producing its low-end chips -- helps ASPs hold up. This early after the report, the decline in ASPs is the only slightly disappointing item in the report in my opinion.

As the Q3 press release shows, most of the metrics of Intel's business continued to improve or hold steady. Consider the profitability level of the company this quarter compared to the third quarter of 1998, with the second quarter of this year thrown in for good measure.

                      3Q99     2Q99     3Q98
Gross Profit          58.7%    58.9%    52.5%
Operating Profit      34.2%*   34.3%    32.0%
Net Profit            25.9%*   25.9%    23.1%
*on a pro forma basis that excludes one-time acquisition and other charges

Margin-wise, the quarter was flat with the second quarter, both of which straddle the typically slower summer months. However, both quarters improved markedly from Q3 (and the other quarters) of last year. In 1998, Intel was under assault in the emerging low-end PC market, forcing the company to sell more expensive chips at cheaper than anticipated prices. In contrast, now Intel is generally leading the low-end market with chips that are inexpensive for it to produce, while its new high-end offerings boost margins and cost-savings -- including a move to smaller micron technology -- help as well.

At the end of the second quarter, management provided guidance of gross margin of 60% plus or minus two points for 1999. They also predicted that Q3 sales would rise "slightly" (sales rose nearly 9% sequentially) and that Q4 would be strongest. We'll see if any of this changes in today's conference call. From the press release, it doesn't appear that this guidance will change.

Now consider the company's balance sheet.
                   3Q99     2Q99     3Q98
Cash                N/A     $3.5B    $2.9B
Investments       $11.8B*   $6.6B    $5.5B
Long-term debt    $884M     $666M    $583M
*this is combined cash and investments, because the detailed 10-Q isn't yet available.

Cash and investments have grown continually at Intel as free cash flow has poured into the company's coffers at a rate higher than it can invest it into 1) new external businesses, 2) new internal ventures, and 3) its existing business.

Now let's consider some history. Since 1989, Intel's sales and cost of sales have grown while gross margin has fluctuated as follows. High and low points are in bold.
           Sales    Cost of Sales   Gross Margin
1998     $26,273      $12,144          53.77%
1997      25,070        9,945          60.03%
1996      20,847        9,164          56.04%
1995      16,202        7,811          51.78%
1994      11,521        5,576          51.60%
1993       8,782        3,252          62.96%
1992       5,844        2,557          56.24%
1991       4,779        2,316          51.95%
1990       3,921        1,930          50.77%
1989       3,127        1,721          44.96%
                                       54.01%
Sales have risen every year since 1989 while gross margin has, on average, trended higher as well. The low point was 1989 and the high was in 1993, though the past three years have been the best combined three years. This year, gross margin should land around 60% to 61%, near the company's high. Sales will easily top $30 billion in 1999.

The company's all-important cash flow continues to improve as well. Cash flow serves to put a value on a stock. All sorts of "goodwill value" exists (how strong is the company's brand, how deep is the moat around the business, how genuine are the smiles in the annual reports), but positive cash flow is what matters over the long run. Eliminate a great brand's cash flow and see what happens to the stock. Intel's cash flow per share was $2.51 in 1998. It should top $3.25 this year. The estimates for the year 2000 exceed $3.80 per share.

All summed, it wasn't a stunning quarter, but it was a good quarter and Drip Port's long-term investment theory -- our reasons for buying and holding the stock -- remain well intact. Twenty years is our holding objective as long as the business excels. Thus far, 10% through our initial holding period, the company is performing well above average and the stock is greatly outperforming.

At $76, Intel trades at 33 times recent 1999 EPS estimates and at 28 times year 2000 estimates. Perhaps more significantly, it trades at 23.5 times this year's estimated cash flow, and at 20 times next year's estimate. We're happy holding and we will be investing more money periodically, commission free, as usual.

Intel's third quarter conference call can be accessed from Intel's investor relation page. As usual, we will have a summary of the conference call tomorrow (the call begins soon). The conference call recording can be heard tonight and through October 15th by picking up ye olde phone and dialing (719) 457-0820 and then entering confirmation number 750229.

To discuss Intel, please visit the Intel message board or the Drip Companies board.

Until tomorrow's conference call summary, Fool on!

Drip Portfolio

10/12/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-1/4$41.31
INTCINTEL CORP3/16$76.69
JNJJOHNSON & JOHNSON-1 5/8$96.75
MELMELLON BANK CORP-5/16$34.19

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip -.59% -.69% 3.56% 12.28% 27.70% 11.70%
S&P 500 -1.66% -1.72% 2.36% 6.82% 39.87% 16.40%
S&P 500(DA) -1.66% -1.72% 2.36% 7.40% 42.49% 17.38%
S&P 500(DCA) n/a n/a n/a n/a 19.87% 8.55%
NASDAQ -1.49% -.49% 4.60% 31.00% 83.01% 31.46%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9721.0839INTC42.592$76.6980.05%
11/14/9710.215JNJ78.341$96.7523.50%
11/5/9825.5267MEL34.137$34.190.15%
4/13/988.174CPB54.586$41.31-24.32%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9721.0839INTC$898.01$1,616.87$718.86
11/14/9710.215JNJ$800.25$988.30$188.05
11/5/9825.5267MEL$871.40$872.69$1.29
4/13/988.174CPB$446.18$337.69($108.49)
  Cash: $24.37  
  Total: $3,839.92  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.