Drip
Portfolio Report
Thursday, February 5, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Feb. 5, 1998) -- Welcome to day three in our Quest For Ultimate Enlightenment On Intel. Before we seek to know the mysterious inner-workings of Intel, let's first look to see where this Great Buddha has the most presence.
In 1996, Japan and the Asia-Pacific region accounted for 30% of Intel's revenues. When the currency crisis hit Asia in late 1997, semiconductor equipment and chip manufacturers' stocks slid, and Intel (Nasdaq: INTC) declined with them. The concern wasn't completely without merit, but it was probably overblown.
In the third quarter of 1997 the "dreaded" region accounted for 28% of Intel's sales, and in the fourth quarter the region constituted 25% of sales. So, there was a 3% drop in the amount of Pacific-Rim sales. But, there was also a 3% drop in the Americas, from 48% of sales to 45%, so drawing any conclusions about Asia is highly fallacious. Meanwhile, European sales picked up any slack, rising from 24% of revenues to 30% in the fourth quarter. For 1997, sales by region broke down as:
Americas 44%
Europe 27%
Asia-Pacific 19%
Japan 10%
It's actually great in the long run that Intel has such a large presence in Asia. I find it humorous when people now positively mention companies (especially tech companies) and say, "And to boot, it has no Asian presence!" Good Fool, that's not really a good thing in the long run. Asia is quite a large and growing market. The largest in the world.
Let's now take a look inside, yes inside, at the important soul of Intel -- the cash flow that the company generates.
There are a few ways to measure cash flow, and the most common is called "gross cash flow." This is what a company earns before interest, taxes, deprecation, and amortization; summarized as EBITDA. (I call it "blah blah blah.") But since interest and taxes are real expenses, gross cash flow is not perfect, so at the Fool we're more likely to look at "free cash flow."
Free cash flow is the real amount of cash that a company generates after all expenses, including interest and taxes. It's important that this number is high enough not to fund continued growth in things like research and development (R&D growth can happen in companies with no free cash flow at all), but instead to have the ability to fund entirely new initiatives, buy back shares, or compound upon an already killer market lead (in Intel's case). Free cash flow is so much extra "gold" that can always increase shareholder value if used correctly.
Figuring the free cash flow number is relatively simple, and it's something that investors, once learned, can run on their companies for the rest of their lives. To obtain this number we look at after-tax earnings, then add back into those earnings the two non-cash charges that the company might have (amortization and deprecation -- costs that aren't real cash expenses, which is why they're added back to earnings), and then we deduct any capital expenditures that the company makes (capital expenditures are usually major investments in the business).
If we look at Intel's earnings statement on the Web, we can see that gross cash flow, or operating income before interest and taxes, was $9.887 billion for 1997. Free cash flow, though, as was just described, is different. Let's figure it out.
Net earnings after taxes and interest was $6.945 billion. Adding back into this number the amortization and deprecation charges, we have $9.137 billion. We then subtract the capital expenditures that the company made, which in 1997 were $4.5 billion. This gives us free cash flow of $4.637 billion in 1997. That's the cash that the company generated last year after all expenses -- after capital expenditures of $4.5 billion, after investing $2.3 billion in research and development, after paying $15 billion in operational expenses and $3.7 billion in taxes.
What is such cash flow used for?
Last year the company bought back $3.37 billion worth of stock, purchased Digital Equipment's (NYSE: DEC) Alpha semiconductor operations for $700 million (and to think that in the past Alpha was seen as threat), and also increased its cash balance by almost $2 billion to nearly $10 billion. (The company earned $800 million in interest alone.) Intel also paid down long-term debt by $300 million, to $448 million.
Capital expenditures are expected to increase 17.7% this year to $5.3 billion, up from $4.5 billion in 1997. Having just figured cash flow, things look great. Gross cash flow should top $10 billion this year, and free cash flow generated after all investments will likely be above $5 billion.
To compete against capital expenditures of $5.3 billion (in state-of-the art fabrication facilities, most of them) and expected research and development of $2.8 billion this year, and then to see your competition (Intel) still add over $2 billion in shareholder equity in 1997 -- heck, if I was an AMD or National Semiconductor employee, I'd want to own Intel stock. Especially since while Intel is plowing forward, the competition is having production yield issues.
So, yeah, I think that Intel is in a pretty good position for 1998. As we're following the company quarterly, if Intel does slowly begin to lose its business strength over the months or years, we'll know it. I think it is much more likely that we'll see it continue to grow stronger. It should be interesting to watch.
This sounds like a wrap-up column on Intel, but it isn't. We have much more to look at next week. On the message boards, some Fools have asked that the column explain Intel's computer networking initiatives, for one. Also, alongside with research and development numbers, and the competition, I want to look at some analysts' recent "calls" on the stock. It's pretty intriguing how some large analysts downgraded Intel the day after the earnings announcement last month. Oops!
If you have questions about Intel, please post them on the Drip Companies message board. Tomorrow we'll have our "Touchstone Friday" report. Fool on!
--Jeff Fischer
FoolWatch -- It's what's going on at the Fool today.
TODAY'S NUMBERS
|
