Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
2017 has not been kind to owners of Intel (NASDAQ:INTC) stock. Down 7% so far this year, Intel shares have lagged the market by nearly 17 percentage points over the past year. And yet, this morning, analysts at investment bank Hilliard Lyons upgraded Intel stock to "Long-Term Buy."
Why? As StreetInsider.com (requires subscription) reports, Hilliard Lyons thinks Intel's "leading position in several mature markets" combined with growth from new markets for semiconductors will grow Intel's business "over the next 5-10 years." And yes, that seems likely. On the other hand, Hilliard Lyons also argues that Intel stock will make for a good investment because the company has a history of "consistent dividend growth, buybacks, and synergies" with the companies it acquires.
Do those arguments hold water? Here are three things you need to know.
Let's start with Hilliard's praise for Intel's mergers and acquisitions team, and the "synergies" they create. Now, there's no doubt that Intel spends a lot of money buying businesses. In 2010, it bought computer security firm McAfee for $7.7 billion, then snapped up Altera in a $16.7 billion deal in 2015, and shelled out another $15.3 billion for Mobileye just earlier this year.
But do these M&A deals really create "synergies"?
Let's give Intel as much benefit of the doubt possible -- and enough time to work its synergistical magic -- and examine the oldest of these deals, the 2010 McAfee acquisition (a deal I panned at the time). As already mentioned, Intel paid $7.7 billion to add McAfee to its stable of businesses, and help build in computer security to its chips. So how well did that deal work out?
From 2011, the first full year after McAfee came in-house as part of the Intel Security Group, to 2016, when it sold off a majority stake in the unit to private equity firm TPG, Intel grew sales at said unit by all of 15% -- from $1.9 billion to just $2.2 billion. (This is according to data provided by S&P Global Market Intelligence.) Compounded, that works out to about 3% annual sales growth over five years, which doesn't look like a whole lot of synergy to me. What's more, by the time Intel ultimately sold a controlling interest in what-used-to-be-McAfee to TPG, the value of the business had fallen from the $7.7 billion that Intel paid for McAfee to an implied value of just $4.2 billion (including debt), according to BloombergMarkets.
Translation: Intel's McAfee acquisition ended up producing not "synergy," but a 45% loss on Intel's investment. I would say that contradicts Hilliard Lyon's assertion that Intel is good at acquisitions.
2. "consistent dividend growth"
Hilliard Lyons is standing on firmer ground when it praises Intel's history of dividend growth, for while Intel doesn't raise its dividend every year, it does raise its dividend most years. According to data from S&P Global, over the past 25 years (i.e., as far back as S&P has data), Intel has failed to raise its annual dividend only seven times -- that's a sterling record of 18 raises, 7 not-raises, and not a single dividend cut. At present, Intel is paying its shareholders a dividend of 3.2% -- 50% better than the average stock on the S&P 500.
So score one for Hilliard Lyons. It says Intel is a great dividend payer -- and Intel is.
The third thing Hilliard Lyons really likes about Intel, though, is a bit less clear-cut.
Analysts predict that Intel stock will grow its earnings at about 7.5% annually over the next five years. Combined with the stock's 3.2% dividend yield, that works out to a total return of about 10.7% -- which is not objectively bad.
On the other hand, Intel stock sells for 14.7 times earnings. Now, in order to get the stock down to what I'd consider value territory and justify a buy rating, you'd really want Intel to be selling for a P/E of 10.7 or less -- not 14.7 or more (for Intel to hit Hilliard Lyons' $41 target price, the P/E would have to go up a bit). So does Intel buy back enough stock -- i.e., does it return enough cash to shareholders in the form of buybacks, rather than dividends -- to make up the difference?
In fact, S&P Global data show that over the past five years, Intel's shares outstanding have declined by only about 5% total, or roughly 1% per year. Giving Intel the benefit of the doubt again, assuming these buybacks will continue and adding that 1% to Intel's expected total return, I still get no more than an 11.7% total return on Intel stock.
With Intel stock selling for 14.7 times earnings, that's still not enough to make Intel a buy in my book.