Big chip Intel (NASDAQ:INTC) and often-hapless innovator Xerox (NYSE:XRX) announced the debut of Intel's new high-performance digital imaging processors built using Xerox algorithms. It's an opportunity to take a snapshot of both stocks.
First, the news. The new chips combine features of an application-specific integrated circuit (ASIC) with a microprocessor, reducing development and manufacturing costs. They will also be programmable. Unlike current ASICs, software can program additions or changes during design or later as an upgrade.
According to prepared statements, Xerox "helped to refine the processor's design by mapping complex document imaging algorithms to the processor as it was being developed. This assured the processor's suitability for document imaging applications." Xerox says it will introduce digital imagers using the chips in 2004 and license its algorithms to other companies to make products compatible with Intel's processors.
According to Intel, the upper-end printing and imaging market produces 130 million units annually that house $5 billion in chips. It helps Intel to have Xerox bring to market products next year that will demand its chips, but Xerox's public statements strain to show its future benefits to be at least as great.
Cash rich Intel trades at heady mulitples: enterprise value (EV) of 28 times trailing-12-month free cash flow (FCF) and market cap, 42 times FCF. Yes, semiconductor companies usually look pricey at the beginning of cyclical upswings. Even if we are in one, whether the Nasdaq's 70%-plus jump from last October anticipated it already is beyond me. Matt Richey is very persuasive when he finds it incredible that Intel is priced today like a "dynamic growth company."
As for Xerox, buying a faded giant with potentially improving finances can pay. This worked for those who snapped up shares of Sears (NYSE:S) in March when it crashed below $20 and said it would try to sell its consumer debt operations to address crushing debt. As a deal with Citigroup (NYSE:C) materialized, Sears stock zoomed to over $40. Do we see improved numbers or prospects for same at Xerox?
The company is certainly more attractive from a value standpoint than when the stock tanked below $5 a year ago October on concerns over accounting, debt, and crushing competition, but there was hardly anywhere to go but up from close to bankruptcy. Today, former execs have settled the civil cases against them and the financials are mixed.
And while revenues are off by single-digit percentages year over year for the last four quarters, free cash flow for same has increased 130%, 32%, 8% and 8%. Total debt is down only from seven times total cash to six times, but the refinancing plan announced in June promises lower interest costs, maturities farther out, and cash from stock sales.
While Xerox sells for an interesting EV to trailing-12-month FCF multiple of 11, and a market cap to FCF multiple of five, I think a quarter or two of developments on the debt side and improved gross margins are necessary before there's a value case for Xerox. But those who find the risk-reward tradeoff today more favorable should let us know on the Xerox discussion board.
Tom Jacobs is Tom Gardner's esteemed guest analyst in next month's "Motley Fool Hidden Gems."
You can find more by Tom Jacobs in his handy archive. He owns no shares of companies mentioned in this article, and discloses his holdings in his profile according to the Motley Fool's disclosure policy.
