Has Intel Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Intel (Nasdaq: INTC  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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% 8.8% Fail
  1-Year Revenue Growth > 12% 23.8% Pass
Margins Gross Margin > 35% 62.5% Pass
  Net Margin > 15% 24.0% Pass
Balance Sheet Debt to Equity < 50% 16.0% Pass
  Current Ratio > 1.3 2.15 Pass
Opportunities Return on Equity > 15% 27.1% Pass
Valuation Normalized P/E < 20 13.02 Pass
Dividends Current Yield > 2% 3.2% Pass
  5-Year Dividend Growth > 10% 14.4% Pass
       
  Total Score   9 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Intel last year, the semiconductor giant has kept its near-perfect score of nine. Even as some raise concerns about a declining PC market, Intel is making strides toward being a bigger presence in mobile-device chips.

Intel has been running on all cylinders for the past year. With a nice bump in its stock price, it's clear that the chip leader in PCs has been doing an effective job monetizing its dominant position in the industry, especially with emerging-market growth helping power PC sales. In its most recent quarterly report, Intel reported sales that rose 22% and earnings that beat estimates.

One reason for Intel's dominance is that it has in-house production capabilities. By contrast, Advanced Micro Devices (NYSE: AMD  ) spun off its GlobalFoundries manufacturing arm and has recently had low production yields on new products, raising the possibility that it might need to go to third-party producer Taiwan Semiconductor (NYSE: TSM  ) to get better-quality chips.

The big criticism that Intel has gotten is that it's behind in mobile devices. Certainly, rival ARM Holdings (Nasdaq: ARMH  ) has gotten a lot of attention with its chip architecture, which leading player NVIDIA (Nasdaq: NVDA  ) has used to develop its quad-core Tegra 3 processor. But Intel recently announced it would release tablets and other mobile devices using its Medfield chip this year.

The growth that a serious entry into the mobile market would create could easily give Intel its final point on the way to perfection. With a healthy and growing dividend, Intel truly stands out from the crowd, and that's why I'm making a CAPScall for the chip giant to continue outperforming the overall market in the future.

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.

Find out more about the latest moves in mobile from the Motley Fool's latest special free report, "The Next Trillion-Dollar Revolution." There, you'll read more about the opportunities from the booming mobile migration as well as China's explosive growth. Get your copy now -- it's free.

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. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of NVIDIA and Intel, as well as writing puts in NVIDIA. 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 (6) | Recommend This Article (5)

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  • Report this Comment On February 16, 2012, at 10:11 AM, roguesisland wrote:

    More nonsense. Apple is the ONLY perfect stock as evidenced by it being the only stock that ever rises in share price. The rest of these companies' share prices just muddle along... for years.

    And I'm afraid Apple will take the whole market down with it when the day comes that the kool-aid wears off, leading to a huge sell off in Intel, why...just because it's Intel.

    The stock market is fraught with thieves, liars and whores.

  • Report this Comment On February 16, 2012, at 11:10 AM, russfischer1013 wrote:

    That is a very nice checklist and I intend to appropriate it for my own use...thank you.

    Add this to your analysis:

    Intel Investment Thesis

    Manufacturing Capacity

    In the 2010 fourth quarter earnings conference call, Intel management discussed a process shrink from 32nm to 22nm. They also mentioned that they have three primary fabrication centers. With a shrink to 22nm those three facilities could be reduced to two and have the same chip output. Surprisingly, the CEO announced that Intel would be going to a four fab model. This move effectively doubles the number of chips the company could produce relative to 32nm.

    What is the added capacity to be used for?

    From Paul Otellini:

    “As we approach our 22-nanometer transition, we are increasing our investments in manufacturing to capture what we believe is a significant opportunity for growth. Stacy will walk you through more details in just in a moment, but in short the market opportunities for our 22-nanometer products are outstanding. As a result, we are growing from the model of three high volume leading-edge manufacturing fabs to four

    Our 22-nanometer process will be the foundation for growing PC and server segments, as well as a broad family of Atom-based SoCs, serving smartphones, tablets, smart TVs, and other embedded devices.”

    Technology

    With the move to 22nm, Intel has grown the lead over the best in class competition to as much as two generations of manufacturing technology. This 22nm technology will also feature TriGate transistors that will increase the performance of the transistors while reducing power consumed dramatically. Some recent information indicates a reduction of 95% in quiescent power consumption when compared to 32nm planar transistors.

    Ultrabook

    Intel is promoting a notebook format called the “Ultrabook”. This product is a thin packaging format similar to the MacBookAir. Intel is subsidizing tooling and supply chain establishment for PC manufacturers to the extent of $300 million. The Ultrabook, in most cases, will be too thin to use a hard disc drive, so flash based solid state drives should have huge growth as this plays out over the next 2-3 years. The boot time for an Ultrabook with a SSD will be seconds, the performance will be much higher relative to a HDD PC and it will be “always connected” even when in sleep mode. The elimination of a HDD and the low power level of the new 22nm TriGate Intel processors will extend battery life substantially.

    Intel makes Solid State Drives. The Intel/Micron partnership has produced the world’s first 128Gb flash chip in the Micron/Intel joint venture fab in Singapore:

    http://seekingalpha.com/news-article/2097633-photo-release-i... The article seems to imply an eight chip stack of these chips to produce a 128GB SSD in a thumbnail size format.

    Mobile

    Many analysts give Intel a bad rap due to their lack of involvement in smart phones and tablet computers. Some even feel that embedded ARM processors represent a serious threat to Intel long term.

    The real fact is that Intel has an architecture that is very high on computational power and also higher on electrical power than these mobile devices could tolerate. Looking at this from the recent past, Intel would not call the mobile business a served market. The devices neither needed the compute power offered by Intel nor could they tolerate the higher power level.

    That all changes at the 22nm TriGate node. The mobile devices need for more compute power than ARM processors can provide is growing and the latest Intel technology will meet or beat the electrical power requirements of these mobile devices.

    The bottom line is that Intel could not participate in this segment until now. They could, however, prepare for engagement in the mobile business. They have done this by building manufacturing capacity and designing low power functional blocks while waiting for their 22nm manufacturing plants.

    We can expect some interesting announcements at the upcoming Consumer Electronics Show in January.

    Infineon

    Bought Infineon’s baseband business in order to have a complete, hassle free, market proven baseband solution that can be embedded in an application processor SoC.

    FPGA

    In an unprecedented move, Intel is doing foundry work for a startup FPGA company. Intel is giving Achronix Semiconductor access to its 22nm TriGate process.

    The speculation is that the payoff for Intel is complete access to the Achronix technology for embedding with Atom processors in order to give mobile products OEM customers a level of product design flexibility not available from any other application processor vendor.

    http://online.wsj.com/article/SB1000142405274870447790457558...

    http://www.eetimes.com/electronics-news/4210263/Intel-to-fab...

    Security

    A while back Intel bought McAfee, probably not just because they like to write big checks. McAfee announced DeepSAFE at the Intel developers forum. DeepSAFE provides security near the silicon level, beneath the operating system. It is very possible that Ultrabooks shipped with the new Intel Ivy Bridge CPUs will have a final solution to the exasperating problems of malware by putting “hooks” in the chip that makes all other security software obsolete. This could be rocket fuel that launches the Ultrabook next year.

    Apple

    Apple and Samsung are locked into 30 different lawsuits in nine countries. To me it is obvious that Apple can no longer depend on Samsung as a supplier of critical component such as their “A” series of application processors.

    The scale of this business will soon approach 300 million devices between the iPod, iPad, and iPhone. The current A5 chip is 122 sq mm in size. That means that 500 chips can be produced on a 12” wafer. 300 million chips will require a leading edge manufacturing capacity of 600,000 wafers per year. That level of capacity/technology only exists at two companies in the world, Samsung and Intel. The Intel technology is two generations advanced from the Samsung process, so moving to Intel would produce a smaller A5 chip at higher speed and even lower power.

    The Citi semiconductor analyst feels this is a distinct possibility and could be made public around the end of the year. http://www.cnbc.com/id/43327072?__source=yahoo|headline|quot...

    In the latest earnings conference call, Otellini was asked if Intel is doing foundry work for anyone. His answer was that they are doing a small amount in the FPGA area (Achronix), and “a couple of strategic customers that I am unable to discuss at this time”. Would Apple be considered strategic?

    While I’m at it, why would Intel do foundry work for a startup FPGA company? My guess is that Intel intends to include a chunk of FPGA in their first mobile SoC product. That would give unparalleled design flexibility to end customers who select that part.

    Side note: Apple and Intel have collaborated on the development of the Thunderbolt technology used in the Apple computers. This is an exclusive arrangement for some period of time, after which it will be opened to other equipment manufacturers. Intel makes the part.

    The Intel investment thesis

    • Ultrabooks will stimulate a new growth cycle in PCs.

    • Solid State Drives represent a $70 billion flash memory opportunity with Intel positioned well.

    • Intel has a huge fabrication technology lead over the next best competitor.

    • Intel is actively building out capacity to serve these new opportunities.

    • Intel’s mobile engagement will begin in 2012.

    • A final security solution.

    • An Apple/Intel relationship is very likely to come out of nowhere to surprise the doubters.

    • An Atom based SoC with embedded baseband and FPGA?

    • Intel’s additional manufacturing capacity could support a relatively short term doubling of the company.

  • Report this Comment On February 16, 2012, at 1:25 PM, jdwelch62 wrote:

    Dan: I read this series on a regular basis. Thanks.

    As you've just done this analysis for Intel, would you please do the same thing for ARM Holdings? Since everyone seems to like to compare INTC to ARMH (which is really an unrealistic comparison), I'd be interested to see how ARMH scores using your method. (Qualcomm and NVIDIA would be interesting to see, too.)

    Thanks, and Fool on!... :-)

  • Report this Comment On February 16, 2012, at 5:58 PM, steltek wrote:

    Intel's economy of scale is the widest moat any company in the world has. PC and mobile processors will converge eventually -- if not in form factor, in design. Intel will undercut the competition. They won't be an amazing growth story, because they're already big. It's unfortunate that there can't be more competition in this space, but the R&D and fab costs make that unfeasible. I'll be impressed if the competitors survive.

  • Report this Comment On February 17, 2012, at 11:33 AM, TMFGalagan wrote:

    @jdwelch62 - ARMH is coming up again but I try to wait a full year for comparison purposes. Here it is from last year: http://www.fool.com/investing/high-growth/2011/04/07/is-arm-...

    QCOM I did recently: http://www.fool.com/investing/general/2012/01/31/has-qualcom...

    as well as NVIDIA: http://www.fool.com/investing/general/2012/02/07/has-nvidia-...

    best,

    dan (TMF Galagan)

  • Report this Comment On February 17, 2012, at 4:51 PM, jdwelch62 wrote:

    Thanks, Dan!

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