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Is Intel the Perfect Stock?

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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first examine what you'd want to see from a perfect stock, and then decide whether Intel (Nasdaq: INTC  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Intel.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 2.4% Fail
  1-Year Revenue Growth > 12% 24.2% Pass
Margins Gross Margin > 35% 66.1% Pass
  Net Margin > 15% 26.8% Pass
Balance Sheet Debt to Equity < 50% 4.3% Pass
  Current Ratio > 1.3 3.48 Pass
Opportunities Return on Equity > 15% 25.6% Pass
Valuation Normalized P/E < 20 12.22 Pass
Dividends Current Yield > 2% 3.4% Pass
  5-Year Dividend Growth > 10% 14.5% Pass
  Total Score   9 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With nine points out of 10, Intel comes as close to a perfect score as we've seen. Its sole blemish, though, exposes one of the only fears investors have about the semiconductor juggernaut.

Intel has long held a near-monopoly on the processors that run PCs. With primary rival Advanced Micro Devices (NYSE: AMD  ) having recently lost its CEO under questionable circumstances, and now facing an uncertain future, Intel might seem well-positioned to continue its dominance.

But the company isn't keeping up in the fast-growing, competitive tablet and smartphone market. With Microsoft (Nasdaq: MSFT  ) reportedly working on a version of Windows that will run on a different chip architecture developed by ARM Holdings (Nasdaq: ARMH  ) , Intel is facing a potentially deadly attack from a new direction. And with customers lining up behind ARM to invest in its technology, that threat could be right around the corner.

Moreover, just yesterday, Intel announced a recall of the chipsets for its Sandy Bridge processor, which combines graphics and CPU functions in one chip. That stands to be the most expensive recall in its history, and customers who use the chip, including Dell (Nasdaq: DELL  ) and Hewlett-Packard (NYSE: HPQ  ) , may be less likely to go back to Intel, even if they don't directly pay for the cost of the recall.

So even though Intel seems to be close to a perfect stock, the company still has to maintain its position. Otherwise, it could easily fall off the pedestal in the years to come. 

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Editor's note: This article has been updated to clarify the recall is for Sandy Bridge chipsets and not the processor itself.

Click here to add Intel to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Intel and Microsoft are Motley Fool Inside Value picks. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel and a diagonal call position on Microsoft. The Fool owns shares of Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2011, at 12:47 PM, techy46 wrote:

    Intel needs 6-9 months for everyone to analyze and understand their Moorestown, Medfield and OakTrail roadmap and strategy. Intel and Microsoft have a very deliberate strategy to protect their existing gross margin and revenue stream while using the resulting profits to aim at their competitors (Apple, ARMH, Qualcomm, Nivida, etc.), They've purposefully taking the extra 2-3 years to use their IP to build an hardware (chip) and software (OS) ecostructure that will compete in the mobile markets w/o sacrificing their extremely profitable enterprise markets. Why would they want to sacrifice a combined $120b desktop, laptop, notebook and server market to produce an additional $30b in revenue from a solution that would reduce the former by one half resulting in a total of $90b? A processor (X86) and OS (Windows) solution for mobile must NOT sacrifice their enterprise margins thus they're building chips and software that will satisfy mobile requirements while not sacrifice enterprise margins. A very selfish and smart business approach if NOT a very social pleasing technical solution. Sure, they COULd build processors (SoC) and OS (W8) that satisfied both enterprise and mobile markets for a total revenue of $90b but then they'd reduce the size of their income and reveune stream by 25% when their desire is to increase same by 25%. They're way too schrewd to screw themselves.

  • Report this Comment On February 02, 2011, at 12:58 PM, turkeybird wrote:

    Why isn't INTEL stock rising? My opinion is that it has gotten too big and a bit bogged down. There is nothing exciting any more - maybe due to the size and the internal red tape that goes along with being a behemoth. Is ingenuity being held back? Maybe if it were to split up into separate companies to focus better and got out from under the corporate bureaucracy it again could soar like an eagle. I have owned the stock off and on for years. I am not a buyer at this point. Bit I am keeping an eye on it.

  • Report this Comment On February 02, 2011, at 1:04 PM, TEBuddy wrote:

    Intel is a money maker, but not necessarily a growth prospect. Does APPL pay a premium on their processors that they charge a premium for to end customers? If Intel actually designed and sold an end item, they could mark it up and make more money like APPL.

    But Intel and AMD and Nvidia dont want to be retailers, they focus on their main business, to deliver the world reliable, yet extremely complex, but low cost semiconductor solutions. Analysts and normal people have a hard time comprehending all of the work and brainpower from these companies to sell their products at such low prices, when someone else makes more money than them but just slapping an LCD screen (that someone else made) to it.

  • Report this Comment On February 02, 2011, at 1:09 PM, TEBuddy wrote:

    If you want a good divend payment to combat inflation and a creeping up value over 20 years then Intel would be good in a portfolio.

  • Report this Comment On February 02, 2011, at 1:21 PM, TheDumbMoney wrote:

    TEBuddy, what a coincidence, that is exactly what I want! :-)

    Also, for the record, the charge INTC took was about $700 million. What's interesting about that was that by the end of the day on January 31st, INTC market cap was still about where it was when the news was announced (and today it's higher). From this, one can draw a number of conclusions. One of those conclusions might conceivably be that with a sub-10 forward P/E, bajillions of net cash on hand, and bajillions of free cash flow, INTC was already undervalued by more than $700 million, so there was no reason for the market cap to go down anywhere near $700 million....

    Also, best to have a sense of scale I think: INTC could practically buy ARMH with just its cash on hand, and certainly could do so with a minimal issuance of debt that would still leave it with with a far-below-average debt-to-equity level. (Not that anti-trust regulators would allow it.)

    INTC is priced as if it will never do anything in smart phones, and as if ARMH will inevitably take the market share that AMD has not been able to take, and/or that AMD will take that share. In short as if its free cash flow will never grow, or that it may even start a long decline. That may be true, but it is also true that no huge opportunity ever arises without the existence of such fears.

  • Report this Comment On February 02, 2011, at 1:43 PM, techy46 wrote:

    Intel sold it's ARM (StrongARM, XScale) subsidary to Marvell in June 2006 for $600m. Intel purposely decided to compete using X86 SoC that could be used in all mobile devices and be W8 compatible put could still protect enterprise market. It was a short term sacrifice that will pay off hugeli by 2012.

  • Report this Comment On February 02, 2011, at 2:20 PM, dfade wrote:

    The statement that "Moreover, just yesterday, Intel announced a recall of its Sandy Bridge processor, which combines graphics and CPU functions in one chip."

    Is not correct, it is the CougarPoint chipset that has a defect...and is a chip used in the Sandybridge platform created by vendors...

  • Report this Comment On February 02, 2011, at 3:52 PM, PoorForLife wrote:

    Please get your facts right before publishing your article. Intel DID NOT recall its new SandyBridge processor. It issued a recall for a relatively small number of its CougarPoint Chipset. Intel is obviously comitted to quality to its customers - I can't say that about a lot of other companys that refuse to issue recalls when they should.

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