This "look-ahead" post discusses how I came up with an estimate for Intel's earnings for fiscal 2021's first quarter, which will end on March 27, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available in April, I will compare the real Income Statement to my prediction and point out any surprises, positive or negative.
But, before we get into the details, let's take a step back and start with background information about Intel.
Intel makes semiconductor chips used in computers, servers, and many other devices. Once the clear leader of its industry, the rapid growth of mobile phones benefited competing firms that did a better job producing chips that consumed less electrical power, a key consideration. Intel has also lost market share because of delays manufacturing new generations of chips. For example, Apple replaced chips from Intel with faster, lower-power devices it designed itself. When the price of Intel's shares dropped in 2020, Third Point, a hedge fund, got involved and advocated for changes. They got their way, at least in part, when Intel announced in January 2021 that its Chief Executive Officer would be replaced by Pat Gelsinger, who was CEO of VMWare and had previously worked at Intel. Even before external pressure to act, Intel had been selling or divesting businesses (e.g., smartphone modems, NAND devices) in which it no longer wanted to compete.
Intel recorded profits of $21 billion, $5.07 per share, on revenue of $78 billion during the last 12 months. In the quarter that ended on December 26, 2020, Intel earned $1.42 per share on a GAAP basis, and it gained $1.52 per share after non-GAAP adjustments and exclusions. See Intel's most recent quarterly report and my review of their results relative to expectations for additional information.
Shares of Intel now trade for about $61 each, giving the company a market value of $252 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.
Readers might be interested in my latest gauge analysis of Intel's financial statements, which looked at factors that affect investment suitability.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
Intel's management communicated their expectations, or "guidance" as it's known, for the March 2021 quarter last January.
For Revenue in the March quarter, Intel estimated $18.6 billion, and I am using that figure.
The estimated operating margin of 27 percent implies operating expenses will be (1 - 0.27) * $18.6 billion = $13.6 billion. Operating expenses include the Cost of Goods Sold (CGS), Research and Development (R&D), Sales, General, and Administrative costs (SG&A), and other lesser costs. Intel's Gross Margin was 56.8 percent of Revenue in the fourth quarter of 2020, and I'm expecting this will improve slightly to 57 percent in the current quarter. This is equivalent to saying I'm looking for the CGS to equal (1- 0.57) * $18.6 billion = $8.0 billion.
R&D expenses were running at about $3.3 billion per quarter most of 2020, but surged to almost $3.7 billion in the fourth quarter as the company worked feverishly to resolve manufacturing issues with its newest chips. I'm assuming R&D will remain at the elevated $3.7 billion level in the March quarter.
I'm expecting based on recent quarters that SG&A expenses to equal 8.5 percent of Revenue, or 0.085 * $18.6 billion = $1.6 billion.
Other, miscellaneous operating charges are usually minor, and I've penciled in $100 million for this line item.
With the assumptions above, operating expenses total $8.0 + 3.7 + 1.6 + 0.1 = $13.4 billion. This is a little below the guidance estimate of $13.6 billion. Operating income would equal $5.2 billion, down substantially from the March 2020 quarter.
Non-operating items include gains (or losses) on equity investments, which is volatile figure, and interest, which doesn't change as much from quarter to quarter. I'm guessing a $200 million gain for the former amount and a $100 million deduction for the latter.
Intel's guidance says we can assume an income tax rate of 14.5 percent for the quarter and that's exactly what I did.
The bottom-line result is Net Income of $4.55 billion ($1.10 per share) in the first quarter of 2021, down from the year-earlier figure, but a little more profitable than the company's guidance suggests.
The following Income Statement summarizes the estimates made as discussed above.
This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed. Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company. These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).
#intel #intc #gcfr #gcfr2 #lookahead #nac_financialanalysis
