Back in our Sesame Street days, we all learned to identify when one thing is not like the other. In the large-capitalization growth space, Intel
Intel -- not like the others
Back in 2000, the best-known large-cap growth companies traded at stratospheric earnings multiples. They were projected to lead investors down the path toward financial independence, thanks to their bright growth outlooks and continued market-beating performance. Nearly six years later, only half of that prediction has materialized. While a number of companies have continued to grow as predicted, their stock prices remain frozen at or near 2000 levels. Today, the case can be made that those companies are cheap, yet still have decent expansion opportunities ahead. Unfortunately, Intel isn't like the others.
The former colossal darlings of the dot-com era included Intel and other industry leaders such as Microsoft
| 5-Year Numbers | Sales Growth | Earnings Growth | High P/E | Low P/E |
|---|---|---|---|---|
| Microsoft | 11.6% | 5.8% | 57.4 | 17.7 |
| Wal-Mart | 10.3% | 13.8% | 42.9 | 15.8 |
| J&J | 11.6% | 16.5% | 35.5 | 16.7 |
| Intel | 2.9% | -1.5% | 162.6 | 13.9 |
Overall, annual earnings at Intel have yet to reach 2000 levels, and its sales growth has been equally anemic, especially compared with the other companies that have continued to grow by double digits.
Computing -- a former growth industry
Intel is highly exposed to selling chips for computers, a business that's no longer considered a growth industry. Much like Microsoft, the other half of the formerly high-flying "Wintel" dynamic duo, Intel has had to invest significant time, energy, and capital into gearing its business model toward faster-growing communication devices and markets, including Wi-Fi, WiMAX, mobile telephone, and network storage chips. Alas, Intel is nowhere near as dominant in those spaces as in the slowing computing world.
Large and techie -- a bad combination
Granted, large-cap growth stocks have performed the worst out of all U.S. asset classes for three of five years since 2000, and they've stood near the bottom for the other two. So far in 2006, through the second quarter, they're once again at the bottom of the heap. But computing and technology stocks have been among the worst industries. From this perspective, Intel is a fit, since it operates among the worst-performing areas of the market.
The chip industry is tough
Next up, Intel has high levels of capital intensity, which eat up a good chunk of operating cash flow. On average, the other companies listed in the chart above have lower capital expenditures and subsequent higher levels of free cash flow -- even tech-related Microsoft. Again, Intel is not like the others.
In addition, the semiconductor space is highly competitive and has certain commodity-like characteristics that are also subject to boom and bust cycles -- not exactly the area a company would choose to operate in if it had a choice. To get an idea of the cutthroat dynamics in the chip industry, consider that archrival AMD
The Foolish final word
Eventually, any stock can get cheap enough. Though I don't think Intel is there yet, it is trading at a historically low multiple. It's also still the 800-pound gorilla of chip companies. But in the land of opportunity cost, I think there are more interesting large-cap stocks in more appealing industries. It's player's choice on the above names, Intel not included.
Investing in large-cap growth stocks since 2000 has been tough, and it's beginning to test the patience of even the most die-hard investors. Eventually, the cycle will reverse itself; it's just a matter of when. For Intel, the wait could be even longer than its peers. I don't see how it can easily return to its former glory. Perhaps bulls should look to adopt the mantra of die-hard Chicago Cubs baseball fans, who never seem to give up hope: Maybe next year.
Think you're done with the Duel? You're not! Go back and read the other three arguments, and then vote for a winner.
Intel, Wal-Mart, and Microsoft are all Inside Value recommendations. Johnson & Johnson is a Motley Fool Income Investor pick.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to further discuss any companies mentioned. The Motley Fool has an ironclad disclosure policy.
