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hey YouTube I'm Jimmy in this video I'm gonna walk through my analysis of the
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Intel Corporation ticker symbol INTC this continues our series or we're
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analyzing all 30 stocks in the Dow Jones Industrial Average this is the 15th
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video in the series we're halfway through and you can see a link to all
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the videos in the description below then after we're done with all 30 companies
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we're going to go out and try to build three different portfolios a value a
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growth and a dividend portfolio Intel's business is broken at the five main
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segments their largest segment is the client computing group this segment
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targets notebook and desktop markets they recently launched their eighth
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generation of Intel's Core processors and the Intel Core X series then we have
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the data center segment that segment focuses on products for the cloud and
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for communication communication infrastructure this segment has a
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potential to keep growing from both artificial intelligence and the cloud
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then we have the Internet of Things segment this segment over the past five
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years has grown in an average rate of 15% a year which is fantastic this
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segment makes up high-performance products for the retail automotive
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industrial and other embedded applications this is a rapidly evolving
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segment so Intel needs to do what it can to stay ahead of the curve when it comes
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to innovation then we have the non-volatile memory Solutions Group and
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the programmable solutions group the memory segments they focus on making 3d
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NAND flash memory and that's used in solid-state memory devices then they
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have the programmable Solutions Group they focus on making programmable
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semiconductors and that's used in cars military data centers communications
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industrials and so on now Intel has claimed claims that over the past year
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this segment both of these segments look to really be picking up speed so that's
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a good thing so I've done research on a bunch of different industries and I was
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curious to see how Intel was going to stack up from a performance perspective
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relative to some of the other companies we've done and I'm not sure if you saw
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our recent IBM video we just published a few days ago but I was
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surprised to see the slide in revenue that IBM has had
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over the past few years so when I got to Intel I was pleasantly surprised that
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this chart this is a revenue chart goes back to 2011 and as you could see after
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being flat for a few years it looks like revenue is starting to
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jump up now these green bars they're estimates but the first three quarters
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of 2018 are already closed so this 2018 estimate is really just how will the
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fourth quarter add to the first three quarters but now let's look at margins
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and as we could see gross profit margins have been a bit all over the place
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and although 2018 looks to be better it seems that analyst expectations are
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there 2019 gross margins will pull back a bit and when we switch over to net
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income margins we can see that what really stands out is the expected jump
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in 2018 and 2019 so if things really play out that way well that would really
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be nice for earnings per share and perhaps the stock price now when I'm
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analyzing a stock I like to look at a few different ratios to see what we can
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uncover about the company any information we can see to try to
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understand what they do or how they're doing it since we're planning to put
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together a dividend portfolio I think it's good that we could start there to
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see how that looks so this chart illustrates the trailing 12-month
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dividends going all the way back to 2008 and the dividend yield at that time the
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current dividend yield is about 2.5 percent that's the red line and that's
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tied to the right axis and we also have the blue bars which tell you how much
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the dividend actually was we could see that it's about $1.20 over the
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past four quarters and we can see that Intel has done a great job of
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consistently paying their dividend generally they've raised their dividend
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every year and then keep it that way for the full year
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the only real exception was right here where they kept it about flat for about
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two years so from a dividend perspective they seemed quite reliable now the
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question is can they keep it up well one good way to tell is by looking at their
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dividend payout ratio ideally we want this ratio to be as low as possible what
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this ratio looks at is how much net income how much of net income did intel
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payout in the form of dividends now you may notice that in q4 2017
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there's no bar at all and this is because intel had a one time loss
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according to US GAAP they lost money in that quarter
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therefore the dividend they did pay out it was against a negative number so they
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put zero here now as an analyst one of the first things I do when I see a one
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time loss or gain is to look to see if it's really a one time thing and what's
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the story behind it in Intel's case that was related to taxes and a did in fact
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look like it was going to be only a one-time hit so as an analyst I would
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typically add this number back and had it been a one-time gain while I was I
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would have subtracted that number from earnings now that's how you end up with
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a chart that looks like this the blue lines are US GAAP and the orange lines
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are analyst adjustments and sometimes you can see that analyst adjust things
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higher sometimes they just things lower now this brings me to a quick side note
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when we switch this chart from net income to revenue we can see that both
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analyst adjusted revenue and GAAP revenue are the same and this is true
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almost all the time and that's because revenue is very hard to mess with you
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either sold something or you didn't and you may hear it called the net revenue
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and that they call it net because that's after products are returned so net
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revenue accounts for products that are sold to the customer and the customer
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keeps them once they return they get deducted from revenue and I think that
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this is important because when we switch back to net income we can see how much
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net income can be adjusted how much how much it can be messed around with now I
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think there's lots of ways from management to move numbers around and I
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each time that can have a big impact on things but our job as analysts is to try
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to move them back to both make them more comparable to other companies and to get
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a truer sense of what profits really look like
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that's why generally you'll see me use adjusted earnings now another ratio you
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can use to check the efficiency of the business is something called inventory
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turnover basically inventory turnover looks at how many times inventory is
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sold and replaced over whatever the period or whatever the time period is in
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this case it's a year so as we could see the most
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recent point is about 3.8 times and the higher the better for this ratio so the
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fact that this ratio is declining for Intel tells us that Intel is selling
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their products less quickly now another ratio that tells a similar story is
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something called the cash conversion cycle this ratio tells us how many days
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it takes for the company to convert inventory into cash now technically this
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ratio includes inventory receivables and payables so the cash conversion cycle is
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basically it says ok intel sold the product Intel collected the receivables
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and then they paid their payables how long does it take to convert cash around
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the loop again back to cash now I don't want to necessarily hold this rising
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cash conversion cycle which is a bad thing by the way and I don't want
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necessarily hold it against them and here's why this chart here shows the
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breakdown of how cash conversion cycle is calculated the orange bars represent
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2017 where the cash conversion cycle was 87 days and the blue bars represent 2014
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where the cash conversion cycle was about 51 days so inventory days are up
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which tells us that the average days in inventory being held often this can tell
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us that management is doing a good or a bad job of predicting whether or not
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they're going to be able to sell their inventory so this being up is a bad
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thing we want to see does this keep getting worse going forward and how much
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worse we don't want management to be too bad at that because we don't them to
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have to carry inventory for a long period of time then we have DSO which is
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days of sales outstanding this measures how many days it takes the company to
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collect the cash from their customers so if this number spikes it could imply
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that management is loosening their payment policy maybe they made them pay
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in 30 days before now they gave him 60 days well depending on the reason that
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this is increasing that could mean something it could tell something about
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the business in Intel's case it's only up slightly so I'm not too concerned
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with it then for accounts payable turnover
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it looks like Intel is paying their payables a bit faster now if you think
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about it from a business perspective that's not too bad of a thing but from a
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cash conversion cycle it's a negative thing
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for the cash conversion cycle ideally what you want is you're barely holding
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an inventory you could turn it over super fast you take a long long time to pay
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your vendors and they pay you right away all your customers pay you right away
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that being said what do we think that Intel's worth and given the business and
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the the reliability of their discounted cash flow I think the reliability of
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their free cash flow I think that using a discounted cash flow valuation is a
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good method to use so for free cash flow we're using analyst estimates and we
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have a WACC of nine percent a perpetual growth rate of two point five percent
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which I think is a reasonable perpetual growth rate to use and we get a fair
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value of about sixty dollars per share now if you're not sure how we came up
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with these numbers I have links in the description below to different videos
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that we made for this entire process so going back to Intel when we consider
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that intel's current price is about forty nine dollars per share our $60
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fair value estimate looks pretty good since that sixty dollars is more than
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twenty percent away from the current price i think that when we go to put
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together our portfolios it's likely that intel appears like it should end up in
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the dividend portfolio the value portfolio based on the current price and
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maybe the growth portfolio depending on how their efficiency ratios look at that
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time i think it's something that we want to we want to monitor because i
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don't want it to go too crazy for any extended period of time but what do you
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think let me know what you think of intel and if you own intel already or if
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you're considering buying it what does your research showing you
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that's perhaps different from what our research has shown you do you think it
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belongs in our portfolio let me know what you think of the comments below and
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don't forget to hit the subscribe button and thanks for sticking with us all the
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way to the end of the video and i'll see in the next video thanks