Jan 19, 2000 at 12:00AM
For one, management expects gross margin to land around 61% this year (plus or minus a few points). So, gross margin will likely rise a point or two from the 59.7% that it reached in 1999, which was up steeply from 1998's 54%. What is this momentum telling us? Mainly, that Intel is a phenomenal operation. Even while the company slashes computer chip prices quarterly, Intel has been able to increase its gross profit margin by making chips with ever-increasing efficiency. Intel's recent ramp to 0.18-micron technology was its fastest ramp in history, demonstrating that Intel is just getting better and better at what it does.
Although Intel's talent makes competitors sweat bullets, it is very beneficial for consumers. Imagine if Microsoft (Nasdaq: MSFT) lowered the cost of its software every quarter, passing along improved business efficiencies to consumers. For various reasons (it isn't a saint), Intel does do this. And by doing so, Intel is helping provide the world with quality computers at continually lower costs, while still not harming its own "private economy," nor threatening the jobs of its 64,000 employees.
Intel's management expects its new chip, named Itanium, to be released by mid-2000. Also, the company is currently moving to 0.13-micron technology, improving from its current (and still new) 0.18 micron. This will decrease Intel's chip production costs and improve its output yet again.
Part of what interested me most about the company's results for 1999 were its 12 acquisitions at a cost of about $6 billion. Intel continues to buy its way into networking, Web hosting, and wireless businesses. Currently these divisions are tiny compared to Intel's chip business, but in the next decade they should become increasingly important. Intel CEO Craig Barrett said, "This year we expect to grow revenues in our networking, communication and wireless businesses by 50 percent or more."
I estimate that Intel's Web hosting, or "server farm" business -- in which the company is pouring a great deal of money to open "farms" around the world -- will play one of the most important roles in Intel's "new" growth in the next five and 10 years. But wherever new business growth comes from, it is encouraging that, so far, Intel has been able spend money and invest in new businesses while simultaneously raising or maintaining its profitability levels.
Now for the numbers that you probably already know (have you memorized them?): Intel's total revenue for 1999 rose 12% to $29.4 billion, while net income was up 29% to a giant $6.3 billion. This performance helps Intel easily surpass our long-term investment criteria of double-digit sales and earnings growth. In fact, so far, Intel has passed all of our criteria.
Intel continues to dominate its industry, margins are expanding along with sales and earnings, it continues to buy back shares and invest in its business (research and development should rise to $3.8 billion from $3.1 billion last year), management still demonstrates top-notch leadership and is pursuing new, related growth opportunities, and, finally, Intel has raised its dividend regularly since we first bought the stock in 1997.
So, we continue to be happy part-owners, for the long term, in this leading computer and technology business. And note that neither Brian (on Friday) nor I mentioned the company's stock price. We focus on the business and its long-term prospects. The stock price takes care of itself. (At $101, Intel trades at around 48 times trailing earnings per share and at 33 times cash flow. It trades at a forward P/E of 37 on year 2000 earnings estimates. Our cost basis, at $45, is 16.8 times year 2000 earnings estimates.) Speaking of the business, yesterday Intel announced new 600 and 655 MHz laptop computer chips with new technology that conserves battery life.
To discuss Intel or ask questions, please visit the Drip Companies message board linked below. We can also discuss Mellon Financial (NYSE: MEL) on this board. We'll look at Mellon's recent record earnings on Friday.
P.S. Don't miss Foolish New Year Resolutions! One resolution is presented daily in January. They will help you keep your finances in Foolish order, while enjoying yourself, too.
Jeff Fischer (TMFFischer) is advisor at Motley Fool Pro and co-advisor at Motley Fool Options.
- Jan 19, 2000 at 12:00AM