Intel’s Stimulus Plan

Company Research, News, Newsletter

Intel (INTC) released an aggressive plan to spend $7 billion over the next two years to upgrade its U.S. chip manufacturing plants.  The investment is planned to produce 7,000 high paying, manufacturing jobs.  Intel executives hope that this strategy will keep them at the front of the pact for the new line of smaller and faster processors.  Intel is the market share leader for microprocessors in the 45 nanometer chip size and are hopping to stay ahead of the curve with these advanced manufacturing facilities, which will make the new 32 nanometer chips.  The investment is clearly a risk with demand for computers taking a major hit during the recession, especially business IT spending.

Intel’s plans are in stark contrast to their main competitor Advanced Micro Devices (AMD) who planned to spin off their manufacturing operations.  I say planned because the spinout to an entity with ties to the government of Abu Dahbi was not upheld by a shareholder vote today.  AMD is currently trying to get back to profitability as the economy has presented many different challenges in the last few years.  The spinoff would have given the company $800 million in cash and taken more than $1.2 billion in debt off the balance sheet.

Intel is being aggressive, trying to expand the gap from industry leader to all the rest in these difficult times.  Clearly, Intel believes that they can control costs on their own in the capital intensive business of manufacturing chips.  The success of Intel’s plan in the short term will be determined by how quickly the economy and thus the demand for technology rebounds.  However, this proactive approach to gain a competitive advantage is a mentality that many of the best companies in the world share.  Management sees an opportunity to expand while others are just trying to keep their heads above water.

The timing of this announcement couldn’t have been better as headlines reference the worst unemployment rate since 1982, and the Obama administration touts efforts to revive the economy through more government efforts and intervention.  We hope that Intel is able to make the most of their manufacturing operations and show that manufacturing in the U.S. does not have to be on the wane.

We currently have an Undervalued valuation on Intel shares at the current price level of $14.08.  Intel’s current price-to-sales is only 2x, which is well below the historically normal range of 2.8x and 5.26x.  Likewise, Intel’s current price-to-cash flow is only 5.4x well below the historical range of 8.52x and 15.85x.  The valuation is appealing, and the dividend of just under 4% is not too bad either.  Furthermore, management has been working to improve ROE consistently over the last few years with mixed results, but it is good to see a company being aggressive, to not just survive but thrive during a downturn.  It is companies that take advantage of their opportunities that will emerge from this mess stronger than before.

Ockham Research Staff @ February 10, 2009

tags: | | | | | |

Leave a comment

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

No Comments