Is Intel a Buffett Stock?

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Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy Intel (NAS: INTC) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Intel meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Intel's earnings and free cash flow history:

anImage

Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Intel has maintained fairly consistent earnings power over the past five years. However, over the next year it plans to double capital spending, which could leave future free cash flow well behind earnings.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity (5-year average)

Intel Corporation

4%

26%

16%

Advanced Micro Devices (NYS: AMD)

134%

69%

(27%)

Texas Instruments (NYS: TXN)

32%

30%

23%

Micron Technology (NAS: MU)

16%

7%

(3%)

Source: Capital IQ, a division of Standard & Poor's.

Like its peers, Intel generates high returns on equity. It employs almost no debt.

3. Management
CEO Paul S. Otellini has been at the job since 2005. He's worked in various management positions at Intel since 1974.

4. Business
The semiconductor industry requires constant reinvestment in research and development to keep up with the pack, though Intel's enormous scale helps shield it from the risk of technological disruption in microprocessors.

The Foolish conclusion
Whether or not Buffett would buy shares of Intel, we've learned that it exhibits many of the quintessential characteristics of a Buffett investment: consistent earnings, fairly high returns on equity with limited debt, tenured management, and a straightforward business.

If you'd like to stay up-to-speed on the top news and analysis on Intel or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. The Motley Fool owns shares of Texas Instruments. The Fool owns shares of and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Intel.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Intel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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