Is Intel a Buffett Stock?

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

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 -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing 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: S&P Capital IQ.

Intel has maintained fairly consistent earnings power over the past five years. The recent decline in free cash flow was due to ramped-up capital expenditures.

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 is.

Company

Debt-to-Equity Ratio

Return on Equity

5-Year Average Return on Equity

Intel16%27%16%
Texas Instruments (NYS: TXN) 53%27%23%
Advanced Micro Devices (NYS: AMD) 118%88%(27%)
Micron (NAS: MU) 22%-2%(4%)

Source: S&P Capital IQ.

In addition to Intel's dominance in the highly profitable central processing chip market, it's here that we see the advantages of scale play out. Intel is so massive that it's able to spend more on research and development and capital expenditures than what AMD and Micron make in combined revenue. Texas Instruments' size advantage, too, gives it considerable operating leverage.

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. A few years back, when AMD began to take a technological lead in some segments, Intel initiated massive price cuts that it was much better able to afford than its smaller peer.

The Foolish conclusion
So is Intel a Buffett stock? Perhaps. Buffett might be hesitant to invest is such a rapidly changing technology, though the company does exhibit many of the quintessential characteristics of a Buffett investment: reasonably consistent earnings, high returns on equity with limited debt, and tenured management. However, to stay up to speed on Intel's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

At the time this article was published Ilan Moscovitzdoesn't own shares of any stock mentioned.The Motley Fool owns shares of Texas Instruments and Intel.Motley Fool newsletter serviceshave recommended buying shares of and creating a bull call spread position in Intel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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