As Intel (Nasdaq: INTC) shareholders, we use each year-end announcement from the company as an opportunity to ask key investment questions: How has the company changed since we began investing in it (which was in 1997)? Should anything influence our original investment premise? Are we still confident about the company's long-term future?
Last night, Intel reported year-end 2000 results, with fourth-quarter earnings of $0.38 per share (before charges), up 12%, on revenue of $8.7 billion, up 6% from 1999 and flat with the previous quarter. For the entire year, revenue rose 15% to a record $33.7 billion, while earnings per share soared 44% to $1.51. This heady growth arrives after net income rose 29% in 1999.
Eyeing the year, we're very happy with the performance. Gross margin remained above 60% despite lower chip prices, sales rose 15% despite lower demand than hoped, and earnings per share soared. The company ended 2000 with $13.8 billion in cash and equivalents, up from $11.8 billion the year prior -- and that's despite investing $6.7 billion in new capital equipment, $3.9 billion in research and development, and $4 billion in share repurchases in 2000.
Looking ahead, Intel estimated that first-quarter sales will decline 15% from the fourth quarter, give or take several percentage points. This is not unusual. On Jan. 12, 1999, Intel stated the same thing about the first quarter of 1999: Sales would decline from the fourth quarter due to seasonal weakness and lower demand. The primary difference now is that the U.S. economy appears to be slowing, and therefore Intel's projections involve more guesswork. The slowdown could prove greater than anticipated.
Even so, Intel projects an increase in sales in the second half of the year -- as usually occurs. To meet demand with a more efficient product, management plans to spend $7.5 billion on new capital equipment. The company is mainly spending for its next-generation 0.13 micron technology, and for investments that should decrease chip production costs 30% starting in 2002. Intel continues to be a success story based on efficient manufacturing in great volume. We'd rather it didn't need to invest so much money annually, but if the return on invested capital (ROIC) is strong enough (as it has been), it is very worthwhile to do so.
So, how has Intel changed in the past three years? It has branched into server farms, invested several billion dollars in networking product companies -- including the new purchase of Xircom (Nasdaq: XIRC) for $750 million -- and, among other initiatives, it aggressively positioned itself in the low-end market with its Celeron chip. (Intel was a zero in the cheap PC market in 1997.) Meanwhile, the company's margins have remained strong, its cash balance has grown by about $6 billion, and its retained earnings have risen significantly.
Retained earnings are earnings that are not paid back to shareholders via a dividend or share buybacks and are not used in acquisitions. Retained earnings at Intel have grown from approximately $7 billion to $24 billion, based on our estimates, in the past six years. Over this time, the company's market value has grown from $56 billion to today's $220 billion. This indicates that for every dollar invested in the business over this time, nearly $10 of market value has been created. (This is one of Brian Graney's favorite tools to measure a company's value creation.)
Overall, the changes at Intel don't challenge our original investment premise. Intel continues to be the company that we originally bought, only financially stronger. The year 2001 may be highly uncertain, but that is not because of missteps at Intel. The long-term future of the company should remain strong as long as PCs, computing devices, servers, and networks continue to become central to our lives. If not, then Intel's annual large investments in new equipment could eventually destroy value rather than create it.
Speaking of that, one number that investors should track is Intel's return on invested capital. Intel is plowing 20% of sales into capital investments, so the return it earns better be strong. Taking a look...
Net operating profits after taxes (NOPAT) ROIC = ------------------------------------------ Invested capital
Intel averaged total assets of about $37 billion in 2000, and the company's NOPAT equaled about $6.6 billion. This results in a 2000 ROIC of about 18%, which is strong (12% is the lowest we'd like to see, as that barely tops the S&P 500's average return).
Intel may be uncertain about its 2001, but we're still certain as possible that it has a financially strong business and, of course, dominates its industry. At $32, the stock trades at a P/E in the mid-20s based on a wide range of possible 2001 earnings results. This year, especially on another decline, we'll be ready to buy more shares periodically.