Drip Portfolio Report
Friday, October 24, 1997
by Randy Befumo ([email protected])

ALEXANDRIA, VA (Oct. 24, 1997) -- INTEL CORP. (Nasdaq: INTC) closed lower again today, down $1 7/8 to $80. The price continues to drift lower while yesterday Jeff sent our $300 investment in the company to Harris Trust. Today's fireworks came as a result of economic upheaval in Southeast Asia, falling prices for dynamic random access memory (DRAM), and Intel's decision to postpone building a $1.8 billion semiconductor wafer fabrication plant for flash-memory for one year. On top of concerns about sub-$1000 PCs shaving Intel's prices and margins, the potential for slowing demand in a recession stricken Far East, and Intel's confirmation that flash-memory was not selling all that well lately has investors focused on the next twelve to twenty-four months running scared.

Good thing we aren't those investors. For those who are thinking about the next twelve to twenty-four months, you probably should read more about this story in tonight's Evening News.

Continuing our look at Intel's last quarter, we left off yesterday with gross margins. Right below gross margins on the income statement are the operating costs. For Intel this consists of research & development (R&D) and marketing, general & administrative (MG&A). Intel's spending on R&D increased to $586 million in the third quarter, up 30.5%. With revenues only growing 19.7%, this means that R&D is growing faster than sales and reducing Intel's operating margins. Although we can make a case that R&D spending is the lifeblood of a company like Intel, this is something to keep an eye on. As a percentage of total sales, R&D increased to 9.5% from 8.7%. We look at R&D as a percentage of sales (literally R&D divided by sales) to track how much of each sales dollar is being eaten up by R&D.

For MG&A, spending grew by 19.6%, right in line with revenues. Although overall this was not excessive, with the increased television advertising that Intel has been pushing, we would look for this to trend upward in future quarters. MG&A currently is 11% of sales, the same as it was last quarter. But it seems that as Intel cuts costs and increases brand awareness efforts and sales incentives, we can expect to see MG&A eat up more of the gross profit left after paying to manufacture chips, motherboards, and other silicon-based products.

Of the 57.2% left from every sales dollar after paying the "Cost of Sales," how much is left after paying for R&D and MG&A? Deducting 9.5% for R&D and 11% for MG&A, this leaves Intel with 36.7% operating margins. Let's repeat that for emphasis. Intel, a manufacturer, has operating margins of 36.7%. The company grew revenues at close to 20%. We are talking about a business that is so profitable it is literally throwing off cash. After adding $151 million in interest income to the $2.4 billion in operating income and paying taxes, Intel is left with $1.6 billion. Profit margins are a stunning 25.5%, dead even with last year but below the peak level hit last quarter.

Intel's cash hoard increased to $9 billion even after repurchasing 2.5 million shares. Under its current repurchase obligation, the company has 72.8 million shares to go. It is obligated to repurchase 6.5 million shares because it has sold an options contract called a put warrant, which will probably be repurchased within the next twelve months. With 1.8 billion shares outstanding, Intel is not at risk of going private anytime soon. However, by repurchasing four percent of its stock over the next few years, the company pumps up its overall growth rate by 0.25% to 0.5% a year.

MONDAY: I will conclude my look at Intel's earnings by talking about its guidance and giving my notion of what the next few years hold for Intel shares.

TODAY'S NUMBERS 

  
              Stock   Close    Change
              Intel   $80     -1 7/8

            Day   Month Year  History
        Drip:    +0.00%   0.00%  0.00% 0.00%
        S&P:     +0.00%   0.00%  0.00% 0.00%
        NASDAQ:  +0.00%   0.00%  0.00% 0.00%


        Rec'd   #    Security         In At      
       9/8/97   1      Intel         $94.69      

                          
                        Base: $800.00
                    Expenses: $ 55.50 (Moneypaper)
                   Purchases: See above
                        Cash: $649.10
                 Total Value: $735.00 apprx.

The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to have $150,000 by August of the year 2017.