Assessment of Solvency for Johnson and Johnson

timer Asked: Jul 5th, 2018
account_balance_wallet $50

Question description

This is a group project where each group member is assigned a portion of the financial analysis, my portion is the Assessment of Solvency. The company we chose is Johnson & Johnson. Attached is the groups project document (Group 16 Strategic Analysis.docx), which is where the Assessment of Solvency will go (you can use this as reference). Also attached is a sample project for another company which has a sample of an Assessment of Solvency on page 56 thru 59.

Please conduct an Assessment of Solvency for Johnson & Johnson. Use the attached sample project as reference.

Financial  Reporting  and  Analysis  of:     Intel  Corporation     Stock  symbol:  INTC   Listed  on  the:   National  Association  of  Securities  Dealers  Automated  Quotation  (NASDAQ)     Prepared  for:   Dr.  Clark  Wheatley   Florida  International  University     In  partial  fulfillment  of  the  requirements  of  the  course:   ACG6175             Table  of  Contents   Page   Executive  Summary  .....................................................................................................................................  3 Strategic  Analysis  .........................................................................................................................................  4 Company  Overview  ..................................................................................................................................  4 Industry  Analysis  ......................................................................................................................................  5 Competitive  Environment  ........................................................................................................................  7 Competitive  Advantage  .........................................................................................................................  10 SWOT  Analysis  .......................................................................................................................................  11 Values  of  Key  Personnel  ........................................................................................................................  14 Societal  Expectation  ..............................................................................................................................  15 Accounting  Analysis  ...................................................................................................................................  16 Policies  ...................................................................................................................................................  16 Flexibility  ................................................................................................................................................  19 Strategy  ..................................................................................................................................................  22 Disclosure  Quality  ..................................................................................................................................  24 Red  Flags  ................................................................................................................................................  25 Distortions  .............................................................................................................................................  26 Financial  Analysis  .......................................................................................................................................  27 Return  on  Equity  Decomposition  ...........................................................................................................  27 Profitability  ............................................................................................................................................  31 Asset  Management  ................................................................................................................................  34 Liquidity  .................................................................................................................................................  36 Debt  &  Coverage  ....................................................................................................................................  39 Sustainable  Growth  ...............................................................................................................................  42 Forecasting  ................................................................................................................................................  43 Sales  .......................................................................................................................................................  44 Income  ...................................................................................................................................................  45 Balance  Sheet  ........................................................................................................................................  48 Valuation  ...................................................................................................................................................  49 Price  Multiples  .......................................................................................................................................  50 Discounted  Free  Cash  Flow  ....................................................................................................................  51 Discounted  Abnormal  Earnings  .............................................................................................................  53 Discounted  Abnormal  Return  on  Equity  ................................................................................................  54 Earnings  Growth  (Buffet’s  Model)  .........................................................................................................  54 Assessment  Of  Solvency  ............................................................................................................................  56 Calculation  of  Altman  Z-­‐Score  Model  ....................................................................................................  57 Estimate  of  Debt  Rating  .........................................................................................................................  58 Actual  Bond  Rating  ................................................................................................................................  59 Conclusion  .................................................................................................................................................  60     2   Executive  Summary     Based  on  Strategy,  Accounting,  Financial,  Credit  and  Prospective  analysis  of  Intel   Corporation,  it  is  undervalued  at  current  price  levels  and  is  a  BUY.    The  analysis  suggests  Intel's   sustainable  growth  rate  is  12%,  with  an  expected  earnings  per  share  growth  of  35%  over  the   next  10  years  and  year-­‐over-­‐year  value  creation  of  6.5%  to  14.7%.    Finally,  with  85%+  of  the   microprocessor  market,  Intel  is  consumer  monopoly  allowing  it  to  command  a  premium  for  its   products  resulting  in  profit  margins  well  above  industry  norms.     3   Strategic  Analysis   Company  Overview     Intel  Corporation  (Intel)  is  a  multinational  semiconductor  chip  maker  headquartered  in   Santa  Clara,  California.    Founded  by  semiconductor  pioneers  Robert  Noyce  and  Gordon  Moore   and  associated  with  visionary  Andrew  Grove,  Intel  combines  advanced  chip  design  capability   with  state-­‐of-­‐the-­‐art  manufacturing  capability1.    Incorporated  in  1968,  Intel's  core  business  is   designing  and  manufacturing  integrated  digital  technology  platforms  consisting  of   microprocessors  and  chipsets2.    These  platforms  are  used  in  various  computing  applications   including  tablets,  smartphones,  laptops,  desktops,  servers,  automobile  systems,  medical   devices  and  factory  machines.    The  company  also  provides  mobile  components  such  as  WiFi   products,  radio  frequency  transceivers,  Bluetooth  products,  power  management  chips  and   global  navigation  satellite  system  components.    In  addition,  through  various  company   acquisitions,  Intel  offers  network  and  content  security  as  well  as  security  software  products  for   consumer,  mobile,  and  corporate  environments.    Intel  sells  its  products  primarily  to   manufacturers  in  the  computing  and  communications  industries.    Intel  has  over  107,000   employees  and  is  the  largest  publicly  traded  semiconductor  manufacturer  by  revenues  with   sales  of  over  $52  billion  last  year3.    The  following  sections  analyze  the  elements  of  Intel's   success.                                                                                                                           1   2   3     4   Industry  Analysis     In  order  to  understand  the  strategic  avenues  Intel  may  pursue,  one  must  understand   the  context  of  the  semiconductor  industry.    The  number  of  semiconductor  components  used  in   our  daily  lives  is  constantly  expanding.    Chips  form  the  core  of  the  newest  technological  devices   such  as  smartphones  and  tablets.    Semiconductors  are  also  becoming  more  common  in   automotive  and  industrial  markets  as  well  as  consumer  goods  such  as  televisions  and   appliances.    As  a  consequence,  the  semiconductor  industry  has  been  growing  for  over  40  years,   in  spite  of  economic  downturns,  the  bursting  of  the  internet  bubble  and  the  2008–2009   financial  crisis,  with  industry  annual  revenues  of  over  $200  billion4.    As  shown  below,  two   companies  dominate  the  semiconductor  industry5.                                                                                                                             4­‐industry-­‐analysis-­‐and-­‐projections.jhtml   5­‐Value-­‐Chain/News/Pages/Semiconductor-­‐Sales-­‐Recover-­‐in-­‐2013-­‐;-­‐Micron-­‐ Surges-­‐to-­‐Fourth-­‐Place-­‐in-­‐Global-­‐Chip-­‐Market.aspx     5     It  should  be  noted,  however,  that  the  semiconductor  space  is  very  complex.    The   semiconductor  industry  is  made  up  of  four  main  product  categories:    memory,  microprocessors,   integrated  circuits  and  complex  "Systems  on  a  Chip",  where  a  single  integrated  circuit  chip  has   an  entire  system's  capability  on  it.    Not  all  manufacturers  participate  in  all  categories.    For   example,  with  the  exception  of  Advanced  Micro  Devices  (AMD),  Intel  dominates  the   microprocessor  segment  with  over  85%  of  the  market  share6.     Due  to  fierce  competition  and  new  technologies  that  lower  the  cost  of  producing   semiconductors,  there  is  a  constant  need  for  semiconductor  manufacturers  to  come  up  with   new  and  cheaper  products.    Thus,  the  semiconductor  industry  is  characterized  by  rapid   technological  innovation.    Another  characteristic  of  the  semiconductor  industry  is  the  high   capital  expenditures  needed  to  support  both  growth  and  technological  progress.    Specifically,   the  fixed  costs  and  minimum  scale  associated  with  building  a  new  chip  fabrication  facility  is  in   the  billions7.    Finally,  the  semiconductor  industry  has  been  characterized  as  being  cyclical.    This   occurs  because  semiconductor  manufacturers  face  booms  and  busts  in  semiconductor  demand.     This  cycle  coincides  with  demand  for  various  electronic  devices  such  as  personal  computers  and   smartphones,  which  is  in  synch  with  consumer  spending  patterns.    In  other  words,  when  the   economy  is  good,  semiconductor  manufacturers  generally  produce  at  capacity.    However,  when   the  economy  is  struggling  and  computer  sales  are  slow,  the  semiconductor  manufacturers   struggle  too8.                                                                                                                           6  McGrath,  D.  (2011-­‐08-­‐02).  IDC  cuts  PC  microprocessor  forecast,  EE  Times,  retrieved  from   7   8     6   Competitive  Environment   In  this  section,  Porter's  Model9  is  used  to  analyze  the  semiconductor  industry.    The     model  is  based  on  five  forces  including  Rivalry  Among  Competition,  Threat  Of  Substitution,   Threat  Of  New  Entrants,  Bargaining  Power  Of  Buyers  and  Bargaining  Power  Of  Suppliers,  each   of  which  is  addressed  in  the  following  paragraphs.     RIVALRY  AMONG  COMPETITION-­‐-­‐The  semiconductor  industry  is  characterized  by   intense  rivalry  between  a  few  companies.    Firms  in  the  semiconductor  industry  compete  to   manufacture  products  that  are  smaller,  faster  and  cheaper10.    This  is  the  result  of  a  short   product  cycle  that  is  associated  with  PC  components  such  as  microprocessors  and  memory  that   are  near  obsolescence  shortly  after  being  released.    The  semiconductor  industry  changes   rapidly  as  technology  demands  change.    This  change  keeps  the  industry  competitive  as  each   company  tries  to  get  to  market  first  with  differentiated  products.    The  result  is  an  industry  that   is  always  on  the  cutting-­‐edge.    The  technology  is  constantly  changing  into  something  better  so   it  is  hard  for  one  company  to  remain  on  top.    What  tends  to  happen  with  this  type  of  rivalry  is   that  there  are  several  industry  players  with  similar  size  that  rise  as  the  larger  players.    This   happens  because  no  one  firm  can  always  be  the  one  with  the  newest,  fastest  and  cheapest   product  available11.                                                                                                                           9  Porter,  M.  (1996).  “What  is  strategy?”  Harvard  Business  Review  74:  61-­‐78.   10   11  Banks,  W.,  (2011).  Semiconductor  Industry  Analysis  &  Competitive  Analysis.    Goizueta  Business  School,  Emory   University.     7     THREAT  OF  SUBSTITUTION-­‐-­‐The  threat  of  substitutes  in  the  semiconductor  industry   depends  on  the  segment12.    In  general,  there  is  no  substitute  for  semiconductors  for  use  in   electronic  products  needing  microprocessors  or  memory.    That  being  said,  new  techniques  to   produce  semiconductor  products  are  possible.    However,  the  rivalry  in  the  semiconductor   industry  has  enabled  the  industry  to  change  manufacturing  lines  in  a  very  short  time.    This   ability  takes  away  opportunities  for  others  to  compete  in  the  market.    The  semiconductor   industry  would  respond  quickly  to  any  successful  substitute  process,  limiting  the  advantage  that   particular  substitute  approach  may  have  had.    Additionally,  given  the  research  and   development  costs,  as  well  as  manufacturing  plant  cost  constraints,  semiconductor  firms  can   find  themselves  spending  significant  amounts  of  money  to  research  and  develop  new  products   just  to  find  that  their  competition  has  already  beat  them  to  it.    This  industry  tension,  keeps  the   semiconductor  business  environment  volatile  and  difficult  for  any  substitutes  to  remain   competitive13.     THREAT  OF  NEW  ENTRANTS-­‐-­‐Setting  up  a  chip  fabrication  facility  requires  billions  of   dollars.    This  high  cost  makes  entry  near  impossible  except  for  the  largest  firms.    Thus,  the   established  semiconductor  firms  have  an  enormous  advantage  over  any  new  entrants.    Another   related  barrier  is  the  short  product  cycle  of  semiconductors.    It  would  require  a  new  entrant  to   the  semiconductor  industry  several  products,  just  to  recoup  the  cost  of  the  manufacturing   plant.    "Fabless”  chip  companies  that  outsource  manufacturing  have  started  to  be  contenders   in  niche  areas.    However,  the  speed  at  which  the  semiconductor  industry  can  adapt  has  limited                                                                                                                           12   13  Banks,  W.,  (2011).  Semiconductor  Industry  Analysis  &  Competitive  Analysis.    Goizueta  Business  School,  Emory   University     8   the  success  of  these  "Fabless”  firms.    Another  potential  threat  is  if  a  business  that  uses   semiconductors  in  their  products  decides  to  backward  integrate  (e.g.,  Apple).    Another   potential  threat  is  indirect  competition  from  governments  that  subsidize  firms  in  their  country,   giving  them  an  unfair  advantage  in  the  market  place.    Finally,  counterfeit  semiconductors  can   also  create  unfair  competitive  forces14.     BARGAINING  POWER  OF  BUYERS-­‐-­‐The  semiconductor  industry  is  dominated  by  a  small   number  of  large  firms.    On  the  other  hand,  there  are  numerous  buyers  ranging  from  PC  makers   to  electronic  do-­‐it-­‐yourselfers.    In  general,  this  means  buyers  have  little  bargaining  power.     However,  there  are  some  exceptions.    Large  PC  and  electronic  device  makers  do  have  some   influence  due  to  the  shear  volume  of  products  they  sell.    Their  consistent  large  purchase   volumes  give  some  computer  and  device  manufacturers  (e.g.,  Dell  and  Hewlett-­‐Packard)   considerable  leverage.    Additionally,  these  high  volumes  help  semiconductor  manufactures   lower  their  per  unit  fixed  costs.    Thus,  there  is  a  symbiotic  relationship  between  the   semiconductors  manufactures  and  the  major  computer  and  device  manufacturers14.     BARGAINING  POWER  OF  SUPPLIERS-­‐-­‐There  are  a  small  number  of  semiconductor   manufacturers  but  a  large  number  of  suppliers.    This  allows  the  semiconductor  firms  to  assert   influence  and  reduce  the  bargaining  power  of  each  individual  supplier  to  a  minimum15.     However,  for  some  niche  services  such  as  fabrication  plant  operation  or  foundries,  "Fabless"   firms,  who  only  design  chips  and  have  others  firms  manufacturer  them,  are  becoming                                                                                                                           14  Banks,  W.,  (2011).  Semiconductor  Industry  Analysis  &  Competitive  Analysis.    Goizueta  Business  School,  Emory   University   15     9   increasingly  dependent  on  a  handful  of  large  foundries.    As  the  suppliers  of  cutting-­‐edge   equipment  and  production  skills,  these  foundries  are  gaining  considerable  bargaining  influence.   Competitive  Advantage     Most  types  of  semiconductors  are  fungible,  forcing  semiconductor  manufactures  to   pursue  a  competitive  strategy  based  on  differentiation.    For  differentiation  to  be  successful,  a   firm  must  achieve  three  things:  1)  identify  attributes  of  a  product  that  customers  value,  2)   position  to  meet  the  customer  need  in  a  unique  manner,  and  3)  achieve  differentiation  at  a  cost   lower  than  the  price  the  customer  is  willing  to  pay16.     Intel  is  the  world's  fifth  most  valuable  brand  worth  $35  billion  and  its  microprocessors   drive  almost  90%  of  the  world's  personal  computers.    Intel  is  able  to  achieve  this  success  by   dominating  the  above  three  elements  of  a  differentiation  strategy.    First,  Intel  employs   anthropologists  who  study  how  people  use  technology  in  their  lives.    Intel  also  uses  focus   groups  to  find  out  what  customers  think  of  future  scenarios  that  Intel  anticipates  such  as   lifestyle  developments.    This  information  helps  Intel's  designers  and  engineers  understand  what   customer  want.    Second,  Intel  doesn't  just  sell  its  semiconductors.    Intel's  approach  is  to  create   many  types  of  chips  and  software,  and  then  combine  them  into  platforms,  where  a  platform  is   an  integrated  set  of  proven  technologies  designed  from  the  start  to  work  together.    These   platforms  enhance  performance  bringing  added  value  for  consumers.    Finally,  Intel  is  a   'manufacturing  monster'  having  invested  billions  of  dollars  in  manufacturing  plants  that  can   produce  more  processors  in  a  day  than  some  of  Intel  rivals  can  produce  in  a  year.    Intel  can                                                                                                                           16  Palepu,  K  &,  Healy,  P  (2007).    Title  Business  Analysis  and  Valuation:  Using  Financial  Statements.    Edition  4.     Publisher  Cengage  Learning.     10   develop  and  bring  a  product  to  market  faster  than  anyone  else.    By  leveraging  this   manufacturing  capability,  Intel  can  increase  production  to  bring  a  product  to  market  in  large   volumes.    This  agility  allows  Intel  to  deliver  a  product  that  consumers  want  at  price  customers   value17.   SWOT  Analysis     A  SWOT  analysis  is  a  structured  planning  framework  to  evaluate  the  strengths,   weaknesses,  opportunities,  and  threats  for  a  firm.    Specifically,  strengths  address  business   characteristics  that  give  the  firm  an  advantage  over  others;  weaknesses  identify  company   characteristics  that  place  the  firm  at  a  disadvantage  relative  to  others;  opportunities  are   circumstances  the  firm  could  exploit  to  its  advantage;  and  finally,  threats  are  conditions  that   could  cause  trouble  for  the  firm.    The  following  paragraphs  apply  the  SWOT  framework  to  Intel.     STRENGTHS-­‐-­‐Intel  is  an  industry  leader.    Intel  controls  over  85%  of  the  microprocessor   market  and  over  50%  of  the  graphics  chip  market.    Intel  is  also  a  big  player  in  the  memory  and   motherboard  market.    This  leadership  position  gives  Intel  more  latitude  to  invest  in  research   and  development,  which  translates  into  increased  efficiency  of  design  and  manufacturing.    Intel   also  has  a  strong  company  network.    Intel  controls  the  entire  production  process  for  most  of  its   products.    This  network  of  manufacturing  facilities  and  assembly/test  facilities  gives  Intel  a   powerful  competitive  advantage.    It  allows  Intel  to  have  more  direct  control  over  processes,   quality  control,  product  cost,  volume,  and  timing  of  production.    Further,  Intel  has  strong  brand   recognition.    Intel  is  the  world's  fifth  most  valuable  brand  worth  over  $35  billion.    This  strong   brand  recognition  coupled  with  strong  market  position  enhances  Intel's  investor  confidence.                                                                                                                             17     11   Additionally,  Intel  has  strategic  partnerships  with  prominent  technology  players  such  as  IBM,   Microsoft,  LG,  AT&T  and  Nokia.    This  allows  Intel  to  launch  new  services,  reach  more   customers,  and  improve  their  expertise  in  niche  areas.    These  strategic  collaborations  enable   Intel  to  expand  its  customer  base  and  product  portfolio,  enhancing  their  competitive   advantage.    Another  strength  is  that  Intel's  research  and  development  capabilities  are  second   to  none.    The  company  consistently  spends  over  $5  billion  a  year  on  research  and  development.     The  result  is  a  consistent  line  of  innovative  products  and  advanced  technologies.    Finally,  Intel   offers  a  broad  portfolio  of  microprocessors.    They  have  microprocessors  and  chipsets  for   notebooks,  netbooks  and  desktops.    Intel  also  supplies  products  for  data  center  and  cloud   computing  environments.    Additionally,  Intel  provides  chips  at  variety  of  price  and  performance   points18  to  meet  various  customer  needs.     WEAKNESSES-­‐-­‐Given  the  fungible  nature  of  semiconductors,  Intel  faces  a  never-­‐ending   battle  with  competitors  trying  to  take  its  leadership  spot.    In  some  niche  areas,  competitors,   such  as  AMD  with  its  64-­‐bit  processor,  are  catching  up  to  Intel.    In  other  areas,  such  as  flash   memory,  companies  like  Samsung  have  overtaken  Intel.    These  challenges  will  likely  continue.     Another  issue  is  the  volatility  of  the  semiconductor  industry.    Overall,  the  industry  is  very   cyclical  with  the  general  health  of  the  economy  dictating  demand  for  semiconductor   components.    Unexpected  changes  in  the  global  economy  can  have  an  extremely  negative   effect  on  Intel  and  the  semiconductor  industry.    Additionally,  in  Intel's  ongoing  pursuit  to   expand  its  customer  base,  it  often  ventures  into  products  like  wireless  chipsets  and   communications.    While  these  offering  expand  Intel's  portfolio,  most  of  Intel’s  revenue  still                                                                                                                           18     12   comes  from  microprocessor  and  motherboard  products.    Thus,  expanding  into  these  non-­‐core   areas,  requires  capital  with  a  disproportionate  return.    Finally,  Intel  is  dependent  on  a  few   customers  for  a  significant  proportion  of  its  revenues.    Intel's  largest  two  customers,  Hewlett-­‐ Packard  and  Dell,  account  for  over  a  third  of  its  revenues.    This  high  dependence  on  a  few   customers  could  reduce  Intel's  bargaining  power  and  increases  its  business  risk19.     OPPORTUNITIES-­‐-­‐Intel  has  acquired  various  companies  to  expand  beyond  its  traditional   PC  and  server  markets.    For  example,  McAfee,  now  a  wholly-­‐owned  subsidiary  of  Intel,  has  a   suite  of  software-­‐related  security  solutions  and  services  that  help  in  protecting  internet-­‐ connected  devices  and  networks  from  malicious  content  and  unsecured  communications.     Another  expansion  example  is  Intel's  purchase  Infineon's  Wireless  Solutions  business.    This   acquisition  further  strengthened  Intel’s  internet  connectivity  strategy  enabling  it  to  offer  a   portfolio  of  products  that  spans  across  a  range  of  wireless  options  from  Wi-­‐Fi  and  3G,  to   WiMAX  and  LTE.    Another  potential  area  for  growth  is  telehealth  and  home  health  monitoring.     Telehealth  is  a  $10  billion  market  and  growing.    Intel  already  offers  technology-­‐enabled   products  that  are  designed  to  reduce  healthcare  costs  and  connect  people  and  information  to   improve  patient  care  and  safety.    To  get  in  on  this  growing  market,  Intel  has  aligned  with  GE  to   market  and  develop  various  home  based  health  technologies.    Finally,  there  is  increasing   demand  for  cloud  computing  infrastructure.    Intel  is  well  positioned  to  benefit  from  this   growing  market.    Specifically,  Intel  offers  products  that  are  incorporated  into  servers,  storage,   workstations,  and  other  products  that  make  up  the  infrastructure  for  data  center  and  cloud                                                                                                                           19     13   computing  environments.    Intel  has  also  invested  heavily  in  various  cloud  computing   companies20.     THREATS-­‐-­‐Due  to  its  domination  in  the  microprocessor  market,  Intel  faces  various  issues   including  antitrust  and  unfair  business  practice  inquires  with  regulatory  commissions  in  Europe,   Asia  and  the  U.S.    Further,  staying  one  step  ahead  of  the  competition  is  what  gives  Intel  its   edge.    Because  of  this,  Intel  is  subject  to  various  security  related  issues,  including  theft  and   misuse  of  its  intellectual  property.    If  successful,  these  attempts  could  harm  Intel's  leadership   position  and  reputation20.   Values  of  Key  Personnel     Intel  values  themselves  as  a  global  technology  and  business  leader.    To  this  end,  they   are  committed  to  doing  the  right  things,  the  right  way.    Intel  sees  corporate  responsibility  as   good  business.    In  their  annual  report,  Intel  outlines  their  strategic  priorities  and  performance   on  a  range  of  environmental,  social  and  governance  factors,  including  workplace  practices,   community  engagement,  and  supply  chain  responsibility21.    Innovation  is  an  integral  part  of   Intel’s  culture.    At  the  heart  of  this  innovation  and  Intel's  business  success  are  its  people.    One   of  the  six  Intel  Values  is  “Great  Place  to  Work,”  which  reinforces  Intel's  strategic  importance  on   investing  in  their  people.    Intel  supports  this  ethos  by  ensuring  a  safe,  respectful  and  ethical   work  environment  that  enables  employees  to  thrive  on  the  job  and  in  their  communities22.     Intel  also  believes  that  technology  plays  a  fundamental  role  in  finding  solutions  to  the  world’s                                                                                                                           20   21   22     14   environmental  challenges.    Intel  is  a  recognized  leader  in  sustainability  for  the  ways  they  work   to  minimize  the  environmental  impacts  of  their  operations.    Additionally,  Intel  designs  products   that  are  increasingly  energy  efficient.    In  2012,  for  the  fifth  year  in  a  row,  Intel  was  the  largest   voluntary  purchaser  of  green  power  according  to  the  U.S.  Environmental  Protection  Agency.    To   underscore  the  importance  of  sustainability  to  their  business,  Intel  includes  an  environmental   component  in  the  formula  used  to  determine  the  payout  for  employee  and  executive  variable   compensation.    Intel  has  also  continued  to  collaborate  with  others  to  drive  global  standards  for   products  and  manufacturing  that  ensure  energy-­‐efficient  performance23.    Finally,  Intel  believes   education  is  the  foundation  of  innovation,  and  as  a  technology  company,  Intel  believes  their   success  rests  on  the  availability  of  skilled  workers,  a  healthy  technology  ecosystem,  and   knowledgeable  customers.    Intel  believes  this  requires  access  to  technology  and  quality   education.    Intel  strives  to  transform  education  through  their  Intel  Foundation  to  collaborate   with  governments  and  educators  and  invests  approximately  $100  million  annually  in  education   programs  around  the  world24.   Societal  Expectation     Intel  is  a  business  leader  controlling  over  85  percent  of  the  microprocessor  market  and   has  the  world's  fifth  most  valuable  brand.    As  a  business  leader,  Intel  is  committed  to  the   highest  standards  of  business  ethics  and  corporate  governance.    Intel  captures  these  values  in   their  Code  of  Conduct25  which  serves  as  a  compass  guiding  the  actions  of  Intel  employees,                                                                                                                           23   24   25­‐code-­‐conduct-­‐corporate-­‐information.html     15   directors,  and  business  partners,  ensuring  consistent  and  uncompromising  integrity.    Further,   Intel  is  dedicated  to  caring  for  people  and  natural  resources  by  designing  safe,  energy-­‐efficient   products  that  minimize  impact  to  the  environment.    To  this  end,  Intel  has  documented  policies   on  Environmental,  Health,  and  Safety;  Climate  Change;  and  Water  use.    Finally,  Intel  is   committed  to  ethical  and  legal  business,  environmental,  human  rights,  and  labor  practices  on  a   worldwide  basis  with  annual  report  statements  related  to  support  for  Human  Rights,  their   stance  against  Human  Trafficking  &  Slavery  and  policy  on  Conflict  Minerals26.    While  most   company  annual  reports  contain  this  type  of  altruistic  language,  a  review  of  Intel  news  releases   for  the  last  year  suggests  Intel's  actions  are  consistent  with  their  commitments.   Accounting  Analysis     The  purpose  of  this  section  is  to  evaluate  the  degree  to  which  Intel's  accounting   captures  its  true  business  practices.    Specifically,  this  section  will  examine  places  where  Intel   has  accounting  flexibility.    Additionally,  this  section  will  evaluate  the  appropriateness  of  Intel's   accounting  policies  and  estimating  techniques.    Together,  these  provide  an  indication  of  the   credibility  behind  Intel's  numbers.   Policies   Intel's  annual  report  outlines  all  of  its  accounting  policies27  which  include  specific     policies  on  Use  of  Estimates,  Fair  Value,  Fair  Value  Hierarchy,  Cash  Equivalents,  Trading  Assets,   Available-­‐for-­‐Sale  Investments,  Non-­‐Marketable  and  Other  Equity  Investments,  Other-­‐Than-­‐ Temporary  Impairment,  Derivative  Financial  Instruments,  Measurement  of  Effectiveness,                                                                                                                           26   27­‐annual-­‐report/2013/10K/57-­‐accounting-­‐policies.html     16   Securities  Lending,  Loans  Receivable,  Inventories,  Property,  Plant  and  Equipment,  Goodwill,   Identified  Intangible  Assets,  Product  Warranty,  Revenue  Recognition,  Advertising,  Employee   Equity  Incentive  Plans,  and  Income  Taxes.    Most  of  these  contain  'boilerplate'  language  that  is   similar  to  the  policies  stated  in  Texas  Instruments  (TXN)  and  Advanced  Micro  Devices  (AMD)   annual  reports.    The  following  paragraphs  highlight  some  of  the  most  notable  policies  as  they   relate  to  the  credibility  of  Intel  financial  statements.     Use  of  Estimates  -­‐  Intel  makes  extensive  use  of  estimates  throughout  its  financial   statements.    These  include  subjective  judgments  on  the  valuation  of  non-­‐marketable  equity   investments,  assessments  on  the  recoverability  of  long-­‐lived  assets,  recognition  and   measurement  of  current  and  deferred  income  taxes,  valuation  of  inventory,  and  recognition  &   measurement  of  loss  contingencies.    While  TXN  and  AMD  make  similar  statements,  these  areas   where  estimates  are  used  warrant  further  investigation  when  examining  the  statements.     Fair  Value  -­‐  Fair  value  is  the  price  that  would  be  received  from  selling  an  asset  or  paid  to   transfer  a  liability  in  an  orderly  transaction  between  market  participants  at  the  measurement   date28.    When  determining  fair  value,  Intel  considers  the  principal  or  most  advantageous   market  in  which  they  would  transact.    The  TXN  and  AMD  reports  contain  nebulous  statements   about  fair  value.    Intel,  at  least  states  they  use  an  optimistic,  but  perhaps  not  realistic,   estimation  methodology.     Inventories  -­‐  Intel  computes  inventory  cost  on  a  first-­‐in,  first-­‐out  basis,  which  is   consistent  with  TXN  and  AMD.    This  industry  first-­‐in,  first-­‐out  inventory  policy  makes  sense   given  the  short  life  of  semiconductor  products.    However,  this  first-­‐in,  first-­‐out  process  suggests                                                                                                                           28­‐annual-­‐report/2013/10K/57-­‐accounting-­‐policies.html     17   eventually  one  of  these  firms  winds  up  having  some  obsolete  inventory  that  will  have  to  written   off.     Goodwill  -­‐  Goodwill  represents  the  excess  of  the  purchase  price  over  the  fair  value  of   net  tangible  and  identifiable  intangible  assets  acquired.    Neither  Intel,  TXN  nor  AMD  amortize   goodwill,  but  test  periodically  for  impairment.    They  all  evaluate  whether  goodwill  has  been   impaired  by  determining  if  the  estimated  fair  value  of  the  acquisition  is  less  than  the  carrying   value.    The  implied  fair  value  is  determined  through  the  use  of  industry  valuation  models.    Any   differences  are  expensed.    This  topic  will  be  discussed  further  under  Long-­‐Lived  Assets.     Revenue  Recognition  -­‐  Intel's  revenue  recognition  is  quite  complex  due  to  its  different   business  segments  and  its  variety  of  end-­‐users.    For  example,  Intel  recognizes  revenue  from   products  sold  directly  to  end-­‐consumers  when  delivery  has  occurred.    For  sales  made  to   distributors,  Intel  defers  product  revenue  and  related  costs  of  sales  until  the  distributors  sell   the  merchandise.    This  is  done  primarily  to  give  the  distributor  price  protection  because  of   frequent  sales  price  reductions  and  rapid  technology  obsolescence  in  the  industry.    Intel  also   receives  revenue  from  license  agreements  primarily  with  the  McAfee  segment.    Revenue  from   these  agreements  is  deferred  and  recognized  over  the  performance  of  the  agreement  period.     Similarly,  revenue  Intel  derives  from  online  subscription  products  is  deferred  and  recognized   over  the  subscription  periods.    For  Intel  professional  services,  revenue  is  recognized  as  services   are  performed.    To  make  revenue  recognition  even  more  complicated,  Intel  has  numerous   relationships  where  all  of  these  elements  are  being  provided  to  a  single  customer.    In  these   cases,  revenue  is  allocated  across  the  separately  identified  deliverables  and  may  be  recognized   or  deferred.    Costs  associated  with  all  of  these  revenue  generating  activities  are  deferred  and     18   amortized  over  the  same  period  that  the  related  revenue  is  recognized29.    While  revenue   recognition  is  not  directly  comparable  for  TXN  and  AMD,  for  basic  components  they  use  similar   revenue  recognition  policies.    Revenue  Recognition  is  an  area  of  accounting  flexibility  that  will   be  discussed  further  in  the  paragraphs  below.   Flexibility     In  the  Management's  Discussion  &  Analysis  section  of  the  annual  report,  Intel  is  very   forthcoming  about  the  extensive  use  of  subjective  estimates  in  their  financial  reporting30.    The   key  areas  include  the  valuation  of  non-­‐marketable  equity  investments,  assessment  on   recoverability  of  long-­‐lived  assets,  recognition  and  measurement  of  current  and  deferred   income  taxes,  the  valuation  of  inventory  and  recognition  and  measurement  of  loss   contingencies.    The  gist  of  these  estimates  are  to  identify  the  fair  value  of  an  asset.    The   estimate  methodologies  provide  ample  accounting  flexibility  for  Intel  and  are  covered  in  more   detail  in  the  following  paragraphs.     Non-­‐Marketable  Equity  Investments  -­‐  Intel  invests  in  non-­‐marketable  equity   instruments  of  private  companies  ranging  from  start-­‐ups  to  mature  companies  with  established   revenue  streams  and  business  models.    At  the  end  of  December  2013,  the  value  of  these  types   of  investments  was  valued  at  $2.3  billion.    Since  these  equity  stakes  are  non-­‐marketable,  Intel   has  to  estimate  their  value.    Intel  uses  two  estimating  approaches.    The  first  is  based  on  using   financial  metrics,  such  as  projected  revenue,  projected  earnings,  and  financial  ratios  of   comparable  public  companies.    The  selection  of  companies  for  comparison  is  an  art  since  the                                                                                                                           29­‐annual-­‐report/2013/10K/57-­‐accounting-­‐policies.html   30­‐annual-­‐report/2013/10K/28-­‐critical-­‐accounting-­‐estimates.html     19   start-­‐up  often  has  a  unique  product  and  service.    Generally,  however,  it  is  based  on  factors   including  company  size,  growth  rate,  industry,  and  development  stage.    For  more  mature   companies,  Intel  uses  a  discounted  cash  flow  model,  which  requires  significant  estimates   regarding  the  company's  revenue,  costs,  and  discount  rates  based  on  the  risk  profile  of   comparable  companies.    Estimates  of  revenue  and  costs  are  developed  using  available  market,   historical,  and  forecasted  data.    If  Intel  determines  the  fair  value  of  an  investment  is  below  the   carrying  value,  Intel  writes  down  the  investment  to  its  fair  value.    It  is  interesting  to  note  that   these  impairments  of  non-­‐marketable  equity  investments  were  $112  million  in  2013,  $104   million  in  2012  and  $63  million  in  2011.    Assuming  the  estimates  are  correct,  Intel's  losses  on   these  types  of  investments  has  doubled  over  the  2  year  period,  although  the  $112  million  only   represents  about  5%  of  the  entire  $2.3  billion  portfolio.     Long-­‐Lived  Assets  -­‐  Property,  Plant,  Equipment,  Goodwill  and  other  Identified   Intangibles  all  follow  an  estimating  approach  similar  to  Non-­‐Marketable  Equity  Investments.     Specifically,  Intel  tries  to  find  comparables  based  on  groupings  of  like  assets.    If  the  assets  are   directly  producing  a  revenue  stream,  then  a  cash  flow  model  is  used.    However,  even  when  a   cash  flow  model  is  used,  considerable  subjective  judgments  regarding  the  remaining  useful  lives   of  assets  have  to  be  made.    In  general,  the  assumptions  and  estimates  used  to  determine  future   values  and  remaining  useful  lives  of  Intel's  long-­‐lived  assets  are  complex,  subjective  and   influenced  by  numerous  external  factors  such  as  industry  and  economic  trends.    Overall,  these   impairments  are  small  relative  to  the  size  of  Intel.    In  2013,  impairment  charges  were  $17     20   million  ($21  million  in  2012  and  $10  million  in  2011).    It  should  be  noted,  however,  these  values   are  small  only  if  you  assume  the  estimates  are  correct31.     Income  Taxes  -­‐  Intel  makes  various  estimates  and  judgments  in  determining  the   provision  for  taxes  related  to  calculation  of  tax  credits,  benefits,  and  deductions.    Further   judgments  are  required  in  the  calculation  of  certain  tax  assets  and  liabilities  that  arise  from   differences  in  the  revenue  and  expense  recognition  timing.    Changes  in  the  assumptions  behind   these  estimates  may  result  in  an  increase  or  decrease  to  Intel's  tax  provisions.    These  tax   related  assumptions  also  provide  another  accounting  flexibility  knob.     Inventory  -­‐  Semiconductor-­‐based  products  can  be  considered  end-­‐products  at  various   stages  of  development.    Intel  has  to  decide  at  what  point  product  costs  change  from  R&D   expenditures,  which  would  be  expensed  in  the  current  period,  to  cost  of  sales,  which  could  be   deferred.    This  point  may  be  different  for  different  customers  providing  Intel  some  flexibility   regarding  how  to  expense  costs.    Intel's  inventory  valuation  is  another  area  providing   accounting  flexibility.    Their  inventory  is  valued  at  the  lower  of  cost  or  market  based  upon   assumptions  concerning  future  demand  and  market  conditions.    Some  of  the  factors  considered   are:  customer  base,  stage  of  the  product  life  cycle,  consumer  confidence,  customer  acceptance   and  an  assessment  of  selling  price  in  relation  to  product  cost.    If  the  estimated  value  of  the   inventory  is  less  than  the  carrying  value,  Intel  writes  down  the  inventory  and  records  the   difference  as  a  charge  to  cost  of  sales.    A  final  aspect  on  inventory  concerns  obsolete  inventory.     Intel's  valuation  of  inventory  requires  an  estimation  of  obsolete  inventory.    To  do  this,  a   demand  forecast  is  utilized.    This  is  then  compared  to  inventory  levels.    If  the  demand  forecast                                                                                                                           31­‐annual-­‐report/2013/10K/28-­‐critical-­‐accounting-­‐estimates.html     21   for  specific  products  is  less  than  inventory  levels,  the  excess  products  are  written  off.    These   estimation  models  are  highly  sensitive  to  assumptions,  giving  Intel  plenty  of  accounting   flexibility  by  designating  'obsolete'  inventory.     Loss  Contingencies  -­‐  This  final  area  also  gives  Intel  considerable  accounting  flexibility.    As   a  leader  in  the  industry,  Intel  is  constantly  subjected  to  various  legal  and  administrative   proceedings  with  potential  financial  claims.    Further,  there  is  always  the  potential  that  product   issues  will  occur  while  they  are  still  under  warranty.    Based  on  these  potential  claims,  Intel   estimates  a  loss  recognized  as  a  charge  to  income,  even  if  the  loss  has  not  occurred  (and  may   not  occur).    This  is  similar  to  making  an  allowance  for  uncollected  accounts.    The  amount  set-­‐ aside  for  loss  contingencies  is  highly  subjective  and  is  definitely  another  'tool'  Intel  could  use  to   smooth  earnings.   Strategy     As  demonstrated  above,  Intel  has  significant  accounting  flexibility.    The  question,   however,  is  whether  or  not  they  are  using  this  flexibility  to  accurately  communicate  Intel's   economic  situation  or  using  it  to  hide  something.    By  comparing  Intel's  policies  to  others  in  the   industry,  we  can  get  a  first  look  at  potential  irregularities.    As  noted  in  the  Policies  section,   Intel's  accounting  policies  are  in  alignment  with  other  companies  in  the  semiconductor  industry   such  as  TXN  and  AMD.     Managers  could  also  be  tempted  to  use  this  flexibility  to  manage  earnings.    Intel   managers,  however,  would  not  be  doing  this  to  avoid  triggering  debt  covenants,  since  Intel  has   more  than  enough  cash  to  pay  off  their  long-­‐term  debt.    One  possibility,  however,  is   accounting-­‐based  compensation.    Over  the  last  3-­‐years,  the  top  7  executives  at  Intel  had     22   compensation  of  $187  million.    Most  of  this  was  in  the  form  of  stock  and  stock  options  ($130   million)32.    Clearly,  there  is  motive  for  these  managers  to  keep  the  stock  climbing.    Another   motive  for  Intel's  accounting  practices  is  to  minimize  the  tax  burden.    Intel  is  pretty  open  about   this,  stating  that  profits  made  in  another  country  will  stay  there  for  reinvestment  purposes   versus  bring  the  profits  back  to  the  U.S.  where  they  would  be  taxed.   There  were  several  accounting  changes  in  2011  and  201233.    In  2011,  Intel  adopted  a     policy  concerning  revenue  recognition  related  to  multiple  deliverables.    This  change  simply   allowed  Intel  to  modify  the  method  by  which  revenue  is  allocated  to  the  separately  identified   deliverables  (recurring  software  subscription  versus  a  one  time  hardware  purchase  by  the  same   customer).    According  to  Intel,  this  change  had  no  material  impact.    There  were  two  other   changes,  one  in  2011  and  one  in  2012,  that  had  no  material  impact,  but  paved  the  way  for  more   accounting  flexibility.    Specifically,  the  changes  allow  Intel  to  assess  qualitative  factors  in   determining  whether  the  fair  value  of  an  asset's  goodwill  and  long-­‐lived  assets  are  going  to  be   less  than  its  carrying  value.    These  qualitative  factors  add  to  the  subjectivity  in  assessing  the  fair   value  of  these  items.     Overall,  the  accounting  strategy  used  by  Intel  seems  to  accurately  represent  the   company’s  financial  activity  and  health.    Their  policies  and  estimates  seem  realistic  and  no   business  transactions  seem  out  of  place.    While  it  still  remains  true  that  Intel  has  significant   accounting  flexibility,  Intel  uses  a  conservative  approach  in  alignment  with  industry  norms.     Finally,  the  auditor  (Ernest  &  Young)  has  this  to  say,  "...the  financial  statements  referred  to                                                                                                                           32­‐execitive-­‐compensation.html   33­‐annual-­‐report/2013/10K/58-­‐accounting-­‐changes.html     23   above  present  fairly,  in  all  material  respects,  the  consolidated  financial  position  of  Intel   Corporation  at  December  28,  2013  and  December  29,  2012".    Additionally,  they  state,  "Intel   Corporation  maintained,  in  all  material  respects,  effective  internal  control  over  financial   reporting  as  of  December  28,  2013".   Disclosure  Quality     Annual  reports  can  be  over  a  100  pages.    The  latest  from  Intel  is  140  pages.    Within   those  pages,  companies  have  a  choice  on  making  it  more  or  less  easy  for  someone  to  assess  the   company's  accounting  quality  and  use  the  statements  to  understand  the  business  reality  of  the   firm.    Overall,  Intel  appears  to  make  an  attempt  to  be  as  transparent  as  possible  with  their   financial  reporting.    While  some  aspects  of  the  accounting  procedures  are  subjective  and   accounting  changes  made  in  2011  and  2012  increase  this  qualitative  approach,  this  seems  to   have  been  done  to  increase  the  level  of  fidelity  into  specific  elements  of  revenue  streams   versus  just  aggregating  them  in  one  number  that  is  reported.     The  Executive  Letters  accompanying  Intel's  annual  report  are  primarily  cheerleading  and   motivational  speech.    However,  the  Management's  Discussion  and  Analysis  of  Financial   Condition  and  Results  (MD&A)  section  is  comprehensive  and  detailed.    The  MD&A  does  an   excellent  job  of  laying  out  the  industry  conditions,  Intel's  competitive  position  and  Intel's  plans   for  the  future.     Early  in  the  MD&A  section,  Intel  lays  out  the  Critical  Accounting  Estimates.    While  this  is   also  true  for  TXN  and  AMD,  Intel  provides  more  than  GAAP  "requires  us  to  make  estimates  and   judgments".    Intel  characterizes  the  main  areas  where  estimates  and  judgments  are  involved   and  then  provides  detailed  information  on  each  of  these  areas.    Further,  Intel  makes  use  of  the     24   footnotes  to  explain  the  accounting  policies  and  assumptions  for  the  way  the  data  are   presented.    Intel  also  does  a  good  job  of  explaining  the  rationale  behind  various  accounting   changes  and  their  impact  on  the  presentation  of  financial  results.     Intel  has  grown  beyond  just  being  a  semiconductor  chip  maker.    The  company  also   provides  mobile  components  such  as  WiFi  products,  radio  frequency  transceivers,  Bluetooth   products,  power  management  chips  and  global  navigation  satellite  system  components.    In   addition,  through  various  company  acquisitions,  Intel  now  offers  network  and  content  security   as  well  as  security  software  products  for  consumer,  mobile,  and  corporate  environments.    Each   of  these  segments  has  different  accounting  practices.    Intel  provides  excellent  discussion  and   breaks  down  the  overall  top-­‐line,  providing  insight  into  the  health  of  each  of  its  business   segments.     Finally,  Intel  has  an  extensive  Investor  Relations  site.    It  contains  the  latest  Intel   corporate  events,  news  releases  and  financial  statements.    Further,  it  contains  an  archive  of   past  news  and  financial  releases.    It  is  also  the  location  where  Intel  posts  the  latest  quarterly   financial  releases.    Overall,  Intel  has  a  high  quality  of  disclosure  and  does  a  great  job  of   explaining  their  assumptions,  accounting  policies  behind  the  numbers  throughout  their   financial  statements;  and  then  making  this  information  available.   Red  Flags     As  just  noted,  the  Intel  Financial  Statements  provide  a  very  high  level  of  disclosure   quality.    Based  on  this,  there  are  few  areas  where  the  accounting  should  be  called  into   question.    Specifically,  there  were  no  unexplained  increases  in  contingencies  or  significant  off-­‐   25   balance-­‐sheet  arrangements.    Further,  the  only  changes  in  accounting  were  to  increase  the   financial  transparency  related  to  revenue  streams  in  different  business  segments.     Before  discounting  any  potential  Red  Flags,  a  couple  of  quantitative  checks  can  be   performed.    The  following  table  shows  a  comparison  of  2009  to  2013  for:  accounts  receivable  in   relation  to  sales  increases,  inventories  in  relation  to  sales  increases,  reported  income  and  cash   flow  from  operating  activities  and  reported  income  and  taxable  income.   Accoutning Analysis Indicators Receivables to Sales Inventories to Sales Net Income to Cash Flow Net Income to Pre-Taxable Income   2009 2010 2011 2012 6.47% 8.36% 31.9% 76.6% 6.57% 8.61% 55.6% 71.4% 6.82% 7.59% 53.9% 72.8% 7.57% 8.87% 49.7% 74.0% 2013 6.99% 7.92% 46.8% 76.3%   The  first  indicator,  Receivables  to  Sales,  can  provide  insight  on  if  the  company  is  relaxing   its  credit  policies  or  artificially  loading  up  its  distribution  channels.    The  above  numbers  for  Intel   don't  suggest  this  happening.    The  second  indicator,  Inventories  to  Sales,  could  be  an  indicator   that  demand  for  products  are  slowing.    Again,  the  above  numbers  don't  suggest  this  is  the  case.     The  third  indicator,  Net  Income  to  Cash  Flow,  could  indicate  changes  in  the  firm's  accrual   estimates.    It  is  assumed  that  the  2009  number  is  due  to  the  recession;  otherwise  the  numbers   are  fairly  consistent  year-­‐over-­‐year.    Finally,  Net  Income  to  Pre-­‐Tax  Income  increases  could   indicate  that  financial  reporting  to  shareholders  has  become  more  aggressive.    All  of  these   qualitative  and  quantitative  measures  provide  no  warning  of  Red  Flags  on  Intel's  Financial   Statements.   Distortions     The  purpose  of  this  section  was  to  evaluate  the  degree  to  which  Intel's  accounting   captures  its  true  business  practices  and  to  provide  an  indication  of  the  credibility  behind  Intel's     26   numbers.    After  analyzing  Intel's  Financial  Statements,  the  analysis  suggests  the  data  in  Intel's   financial  reports  clearly  and  accurately  reflect  the  financial  health  of  the  firm.    There  were  no   questionable  practices  that  would  lead  one  to  believe  that  Intel’s  management  was  trying  to   misrepresent  the  numbers.    All  changes  in  accounting  were  documented  with  the  rationale  and   the  impact  on  the  financial  statements.    While  Intel's  accounting  policies  provide  ample   accounting  flexibility,  the  accounting  analysis  suggests  Intel  is  applying  these  policies   responsibly  while  documenting  their  actions  and  logic  in  the  footnotes.    Because  of  the  above   findings,  no  adjustments  to  the  financial  statements  are  necessary.   Financial  Analysis     The  financial  statements  of  a  company  contain  information  that  reveal  the  company’s   financial  position.    This  information  can  be  combined  using  various  ratios  to  assess  the   company’s  financial  health.    This  section  is  focused  on  using  the  financial  information  in  Intel’s   financial  statements,  as  well  as  Intel's  primary  competitors  (Advanced  Micro  Devices  (AMD)  &   Texas  Instruments  (TXN)),  to  see  where  Intel  stands  with  respect  to  those  competitors  and  the   industry  (average  of  INTC,  AMD  &  TXN).    The  key  areas  examined  are:  Return  on  Equity   Decomposition,  Profitability,  Asset  Management,  Liquidity,  Debt  &  Coverage  and  Sustainable   Growth.    The  data  examined  covers  31  Dec  2004  to  31  Dec  2013.   Return  on  Equity  Decomposition     This  section  will  breakdown  Intel's  Return  on  Equity  (ROE)  into  its  building  blocks  to   yield  a  deeper  understanding  of  Intel's  strategic,  investment  and  financing  decisions.    These   basic  building  blocks  for  Intel  will  also  be  compared  to  the  build  blocks  for  two  of  Intel's   competitors  (TXN  and  AMD).    The  breakdown  of  ROE  is  as  follows:     27   ROE   =  (Income/Equity)       =  (income/assets)  x  (assets/equity)     =  (income/sales)  x  (sales/assets)  x  (assets/equity)   The  following  tables  show  the  ROE  breakdown  for  Intel  as  well  as  TXN  and  AMD.   INTC ($ millions) Net Income Sales Net Profit Margin (ROS) Total Assets Asset Turnover Return on Assets Shareholders Equity Financial Leverage Return on Equity 2004 7,516 34,209 21.97% 48,143 0.71 15.61% 38,579 1.25 19.48% AMD ($ millions) Net Income Sales Net Profit Margin (ROS) Total Assets Asset Turnover Return on Assets Shareholders Equity Financial Leverage Return on Equity 2004 TXN ($ millions) Net Income Sales Net Profit Margin (ROS) Total Assets Asset Turnover Return on Assets Shareholders Equity Financial Leverage Return on Equity 2004   91 5,001 1.82% 7,844 0.64 1.16% 3,010 2.61 3.03% 1,861 12,580 14.79% 16,299 0.77 11.42% 13,063 1.25 14.25% 2005 2006 8,664 38,826 22.31% 48,314 0.80 17.93% 36,182 1.34 23.95% 2005 2007 5,044 35,382 14.26% 48,368 0.73 10.43% 36,752 1.32 13.72% 2006 165 5,848 2.83% 7,288 0.80 2.27% 3,352 2.17 4.94% 2005 2007 -166 5,649 -2.94% 13,147 0.43 -1.26% 5,785 2.27 -2.87% 2006 2,324 13,392 17.35% 15,063 0.89 15.43% 11,937 1.26 19.47% 6,976 38,334 18.20% 55,651 0.69 12.54% 42,762 1.30 16.31% 5,292 37,586 14.08% 50,715 0.74 10.43% 39,088 1.30 13.54% 2008 -3,379 -3,098 6,013 5,808 -56.19% -53.34% 11,550 7,675 0.52 0.76 -29.26% -40.36% 2,990 -82 3.86 -93.60 -113.01% 3778.05% 2007 4,341 14,195 30.58% 13,930 1.02 31.16% 11,360 1.23 38.21% 2008 2,657 13,835 19.20% 12,667 1.09 20.98% 9,975 1.27 26.64% 2008 1,920 12,501 15.36% 11,923 1.05 16.10% 9,326 1.28 20.59% 2009 2010 4,369 35,127 12.44% 53,095 0.66 8.23% 41,704 1.27 10.48% 2009 2011 11,464 43,623 26.28% 63,186 0.69 18.14% 49,430 1.28 23.19% 2010 376 5,403 6.96% 9,078 0.60 4.14% 648 14.01 58.02% 2009 2011 471 6,494 7.25% 4,964 1.31 9.49% 1,013 4.90 46.50% 2010 1,470 10,427 14.10% 12,119 0.86 12.13% 9,722 1.25 15.12% 12,942 53,999 23.97% 71,119 0.76 18.20% 45,911 1.55 28.19% 491 6,568 7.48% 4,954 1.33 9.91% 1,590 3.12 30.88% 2011 3,228 13,966 23.11% 13,401 1.04 24.09% 10,437 1.28 30.93% 2,236 13,697 16.32% 20,497 0.67 10.91% 10,952 1.87 20.42% 2012 11,005 53,341 20.63% 84,351 0.63 13.05% 51,203 1.65 21.49% 2012 -1,183 5,422 -21.82% 4,000 1.36 -29.58% 538 7.43 -219.89% 2012 1,759 12,690 13.86% 20,021 0.63 8.79% 10,961 1.83 16.05% 2013 9,620 52,708 18.25% 92,358 0.57 10.42% 58,256 1.59 16.51%   2013 -83 5,299 -1.57% 4,337 1.22 -1.91% 544 7.97 -15.26%   2013 2,162 12,205 17.71% 18,938 0.64 11.42% 10,807 1.75 20.01%   What  follows  is  a  comparison  of  Net  Profit  Margin,  Asset  Turnover  and  Financial   Leverage  across  Intel,  TXN,  AMD  as  well  as  the  industry  average.    Return  on  Equity  and  Return   on  Assets  will  not  be  covered  here  since  they  will  be  covered  in  a  later  section.    The  following  is   the  data  for  Net  Profit  Margin  for  the  10  year  period.   Net Profit Margin INTC AMD TXN Industry 2004 2005 2006 22% 22% 14% 2% 3% -3% 15% 17% 31% 13% 14% 14% 2007 2008 2009 2010 18% 14% 12% 26% -56% -53% 7% 7% 19% 15% 14% 23% -6% -8% 11% 19% 2011 2012 2013 24% 21% 18% 7% -22% -2% 16% 14% 18% 16% 4% 11%     28   40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 INTC -10% AMD TXN -20% Industry -30% -40% -50% -60% -70%     Net  Profit  Margin  is  an  indication  of  how  much  the  firm  keeps  as  profits  for  every  dollar   in  revenue.    The  above  chart  is  not  as  clear  cut  as  Gross  Profit  Margin.    However,  the  above   chart  does  show  that  Intel  consistently  leads  the  industry  over  the  entire  timeframe.    Overall,   Intel  is  consistent  with  TXN  over  this  timeframe  with  an  average  Gross  Profit  Margin  of  19%.     This  consistency  lends  strong  credibility  to  Intel's  management  that  they  will  continue  to   convert  sales  in  to  profits.     Next,  the  Asset  Turnover  data  for  the  10  year  period  is  as  follows.   Asset Turnover INTC AMD TXN Industry 2004 2005 0.71 0.64 0.77 0.71 0.80 0.80 0.89 0.83 2006 2007 2008 2009 2010 2011 2012 0.73 0.43 1.02 0.73 0.69 0.52 1.09 0.77 0.74 0.76 1.05 0.85 0.66 0.60 0.86 0.71 0.69 1.31 1.04 1.01 0.76 1.33 0.67 0.92 0.63 1.36 0.63 0.87 2013 0.57 1.22 0.64 0.81     29   1.60 1.40 1.20 1.00 INTC AMD 0.80 TXN Industry 0.60 0.40 0.20 0.00 2004   2005 2006 2007 2008 2009 2010 2011 2012 2013   The  Asset  Turnover  indicates  how  many  sales  dollars  the  firm  is  able  to  generate  for   each  dollar  in  assets.    At  first  glance,  this  appears  to  be  the  first  indicator  where  Intel  does  not   dominate  or  at  least  perform  in  the  top  of  the  industry.    This  seems  at  odds  with  all  of  the  other   data  and  may  be  the  result  of  several  factors.    Specifically,  as  noted  in  the  Strategy  section,  Intel   dominates  the  semiconductor  industry  through  a  strategy  of  differentiation  where  the   company  spends  over  $5  billion  a  year  on  research  and  development.    Additionally,  Intel  is  a   semiconductor  manufacturing  powerhouse.    While  Intel  may  be  tremendously  successful  in   manufacturing  state-­‐of-­‐the-­‐art  semiconductors  at  scale,  it  isn't  cheap.    The  above  data  could   suggest  that  it  is  expensive  to  be  and  stay  at  the  top.     The  final  indicator  will  be  Financial  Leverage  with  data  for  the  10  year  period  as  follows.   Financial Leverage INTC AMD TXN Industry 2004 1.25 2.61 1.25 1.70 2005 1.34 2.17 1.26 1.59 2006 1.32 2.27 1.23 1.60 2007 1.30 3.86 1.27 2.14 2008 2009 1.30 1.27 1.28 1.29 1.25 1.26 2010 1.28 4.90 1.28 2.49 2011 1.55 3.12 1.87 2.18 2012 1.65 7.43 1.83 3.64 2013 1.59 7.97 1.75 3.77     30   9.00 8.00 7.00 6.00 INTC 5.00 AMD TXN 4.00 Industry 3.00 2.00 1.00 0.00 2004   2005 2006 2007 2008 2009 2010 2011 2012 2013   Financial  leverage  indicates  how  many  dollars  of  assets  the  firm  is  able  to  deploy  for   each  dollar  invested  by  shareholders.    As  can  be  seen  in  the  chart,  AMD's  financial  leverage  is   quite  volatile  and  two  years  (2008  and  2009)  had  to  be  removed  to  accurately  see  the  data  for   Intel  and  TXN.    Intel's  financial  leverage,  on  the  other  hand,  is  very  consistent  over  the  10-­‐year   period,  but  did  see  a  jump  in  2011  associated  with  various  acquisitions.    This  suggests  Intel   follows  a  very  disciplined  approach  to  using  leverage  for  growth.   Profitability     For  profitability,  three  ratios  are  investigated:    Return  on  Equity,  Return  on  Assets  and   Gross  Profit  Margin.    The  Return  on  Equity  data  for  the  10  year  period  is  shown  below.   Return on Common Equity INTC AMD TXN Industry NA = Not available 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 NA 23% 14% 18% 13% 11% 25% 27% 23% 18% NA 5% -4% -77% -213% 107% 57% 38% -111% -15% NA 19% 37% 25% 20% 15% 32% 21% 16% 20% NA 16% 16% -12% -60% 45% 38% 29% -24% 7%     31   150% 100% 50% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 INTC AMD -50% TXN Industry -100% -150% -200% -250%     Return  on  Equity  (ROE)  is  a  comprehensive  indicator  of  a  firms  performance  because  it  provides   an  indication  of  how  well  managers  are  employing  the  funds  invested  by  the  firm's  shareholders  to   generate  returns.    The  above  data  show  INTC  had  a  positive  ROE  over  the  entire  timeframe.     Additionally,  the  INTC  average  ROE  over  the  time  frame  was  19%  compared  with  the  industry  average  of   6%.    Also  of  note  is  that  the  variability  of  the  INTC  ROE  is  lower  than  both  TXN  and  AMD.    This  low   variability,  positive  ROE  suggests  a  well  thought  out  strategy  is  being  consistently  applied  by  INTC   management.     Next,  the  Return  on  Assets  data  for  the  10  year  period  is  as  follows.   Return on Total Assets INTC AMD TXN Industry NA = Not available 2004 NA NA NA NA 2005 2006 18% 10% 7% 3% 15% 30% 13% 14% 2007 2008 2009 2010 13% 10% 9% 20% -22% -27% 21% 9% 20% 16% 4% 0% 15% 15% 2011 2012 2013 19% 14% 11% 14% -23% 2% 13% 9% 11% 15% 0% 8%     32   40% 30% 20% INTC 10% AMD TXN 0% Industry 2005 2006 2007 2008 2009 2010 2011 2012 2013 -10% -20% -30%     Return  on  Assets  (ROA)  tells  how  much  profit  a  company  is  able  to  generate  for  each  dollar  of   assets  invested.    ROA  is  generally  seen  as  a  barometer  of  how  efficient  management  is  at  using  its  assets   to  generate  earnings.    The  above  data  show  INTC  had  a  positive  ROA  over  the  entire  timeframe.     Additionally,  the  INTC  average  ROA  over  the  time  frame  was  14%  compared  with  the  industry  average  of   9%.    Also  of  note,  is  that  the  variability  of  the  INTC  ROA  is  lower  than  both  TXN  and  AMD.    Similar  to  the   ROE  insight,  this  low  variability,  positive  ROA  is  a  confirmation  indicator  suggesting  a  well  thought  out   strategy  is  being  consistently  applied  by  INTC  management.     The  final  profitability  measure  examined  in  this  section  is  Gross  Profit  Margin.    The  Gross  Profit   Margin  data  for  the  10  year  period  is  as  follows.   Gross Profit Margin INTC AMD TXN Industry 2004 2005 72% 64% 57% 64% 71% 62% 59% 64% 2006 2007 2008 65% 63% 59% 63% 65% 55% 61% 60% 68% 59% 59% 62% 2009 70% 62% 57% 63% 2010 77% 48% 60% 62% 2011 2012 74% 49% 57% 60% 76% 44% 57% 59% 2013 74% 40% 60% 58%     33   90% 80% 70% 60% INTC 50% AMD TXN 40% Industry 30% 20% 10% 0% 2004   2005 2006 2007 2008 2009 2010 2011 2012 2013   Gross  Profit  Margin  is  an  indication  of  the  extant  to  which  revenues  exceed  direct  costs   associated  with  sales.    Gross  Profit  Margin  is  influenced  by  two  factors:  1)  the  price  premium  that  a   firm's  products  command  in  the  market  place,  and  2)  the  efficiency  of  the  firm's  procurement  and   product  process.    The  above  data  show  INTC  consistently  outpaced  the  its  competitors  on  Gross  Profit   Margin  over  the  entire  timeframe.    Specifically,  INTC  surpassed  the  Industry  average  by  10  percentage   points.    INTC  dominance  on  this  measure  is  attributable  to  their  brand  value  which  allows  them  to   command  a  premium  for  INTC  products  and  their  superior  manufacturing  processes  that  allow  them  to   keep  costs  as  low  as  possible.   Asset  Management     For  asset  management,  two  ratios  are  investigated:    Operating  Working  Capital   Turnover  and  Inventory  Turnover.    The  Operating  Working  Capital  Turnover  data  for  the  10  year   period  is  shown  below.   Operating Working Capital Turnover INTC AMD TXN Industry 2004 2.0 3.4 1.7 2.4 2005 2.9 3.6 1.7 2.7 2006 3.2 4.4 2.2 3.3 2007 2.8 4.5 2.5 3.3 2008 3.7 11.8 2.8 6.1 2009 2.8 2.1 2.1 2.4 2010 2.2 3.1 2.5 2.6 2011 4.2 3.2 2.4 3.3 2012 3.3 5.6 1.9 3.6 2013 3.1 2.7 1.9 2.6     34   14.0 12.0 10.0 INTC 8.0 AMD TXN 6.0 Industry 4.0 2.0 0.0 2004   2005 2006 2007 2008 2009 2010 2011 2012 2013   Operating  Working  Capital  Turnover  compares  the  use  of  working  capital  to  the   generation  of  sales  over  a  specified  period.    The  capital  is  used  to  fund  operations  and  purchase   inventory.    These  are  then  converted  into  sales  revenue  for  the  company.    In  a  general,  the   higher  the  working  capital  turnover,  the  better.    The  above  data  are  inconclusive  as  to  a  firm   that  best  uses  Operating  Working  Capital.    It  should  be  noted,  however,  that  INTC  is  the  only   firm  with  a  positive  trend  over  the  10  year  time  frame.    This  suggests  they  are  increasing  their   ability  maximize  Operating  Working  Capital  over  time.     Next,  the  Inventory  Turnover  data  for  the  10  year  period  is  as  follows.   Inventory Turnover INTC AMD TXN Industry 2004 13.1 5.7 10.0 9.6 2005 12.4 15.0 10.5 12.7 2006 2007 8.2 11.4 6.9 7.3 9.9 9.8 8.3 9.5 2008 2009 2010 2011 2012 2013 10.0 12.0 11.6 13.2 11.3 12.6 8.9 9.5 10.3 13.8 9.6 6.0 9.1 8.7 9.2 7.7 7.2 7.1 9.3 10.1 10.4 11.5 9.4 8.6     35   16.0 14.0 12.0 10.0 INTC AMD 8.0 TXN Industry 6.0 4.0 2.0 0.0 2005   2006 2007 2008 2009 2010 2011 2012 2013   Inventory  Turnover  shows  how  many  times  a  firm's  inventory  is  sold  and  replaced  over  a   specified  period.    A  low  turnover  implies  poor  sales  and  excess  inventory.    A  high  ratio,  on  the   other  hand,  implies  strong  sales.    A  low  turnover  can  be  especially  troublesome  if  products  are   perishable  and  can  deteriorate  as  they  sit  and  wait  to  be  sold.    The  above  data  again  show  the   ability  of  INTC  to  effectively  gauge  market  demand  and  not  manufacture  semiconductor   products  that  will  be  out-­‐of-­‐date  within  18  months.   Liquidity     For  liquidity,  three  ratios  are  investigated:    Current  Ratio,  Quick  Ratio  and  Operating   Cash  Flow  Ratio.    The  Current  Ratio  data  for  the  10  year  period  is  shown  below.   Current Ratio INTC AMD TXN Industry 2004 3.0 1.7 5.3 3.3 2005 2.3 2.0 3.9 2.7 2006 2.1 1.4 3.8 2.4 2007 2.8 1.5 3.4 2.6 2008 2.5 1.1 3.8 2.5 2009 2.8 1.9 3.9 2.9 2010 3.4 2.1 3.6 3.0 2011 2.2 1.8 2.2 2.1 2012 2.4 1.6 2.4 2.2 2013 2.4 1.8 2.9 2.4     36   4.5 4.0 3.5 3.0 INTC 2.5 AMD TXN 2.0 Industry 1.5 1.0 0.5 0.0 2005   2006 2007 2008 2009 2010 2011 2012 2013   The  Current  Ratio  is  a  widely  accepted  index  of  a  firm's  short-­‐term  liquidity.    Analysts   generally  view  a  current  ratio  of  more  than  one  to  be  an  indication  that  the  firm  can  cover  its   current  liabilities  from  the  cash  realized  from  its  current  assets.    As  shown  above,  INTC  has   maintained  a  healthy  ability  to  cover  its  current  liabilities  using  current  assets  with  average  of   2.5  times  the  amount  of  current  assets  required  to  cover  current  liabilities.     Next,  the  Quick  Ratio  data  for  the  10  year  period  is  as  follows.   Quick Ratio INTC AMD TXN Industry 2004 2.5 1.0 4.2 2.6 2005 1.8 1.5 3.0 2.1 2006 1.5 0.9 2.6 1.7 2007 2.1 1.0 2.3 1.8 2008 1.7 0.6 2.3 1.5 2009 2.1 1.5 2.6 2.1 2010 2.7 1.6 2.3 2.2 2011 1.5 1.5 1.3 1.4 2012 1.7 1.2 1.5 1.5 2013 1.8 1.2 1.8 1.6     37   3.5 3.0 2.5 INTC 2.0 AMD TXN 1.5 Industry 1.0 0.5 0.0 2005   2006 2007 2008 2009 2010 2011 2012 2013   The  Quick  Ratio,  sometimes  referred  to  as  the  acid  test,  is  similar  to  the  Current  Ratio   but  only  includes  cash,  cash  equivalents  and  accounts  receivable  as  part  of  the  current  assets.     For  INTC,  it  is  safe  to  include  accounts  receivable  since  the  creditworthiness  of  INTC's  largest   customers  (Dell  and  Hewlett-­‐Packard)  are  beyond  dispute.    Similar  to  the  Current  Ratio,  a  quick   ratio  of  more  than  one  is  an  indication  that  the  firm  can  cover  its  current  liabilities  from  cash,   cash  equivalents  and  accounts  receivable.    As  shown  above,  INTC  has  maintained  a  healthy   ability  to  cover  its  current  liabilities  using  just  cash,  cash  equivalents  and  accounts  receivable   with  average  of  almost  2  times  the  liquid  assets  required  to  cover  current  liabilities.     The  final  liquidity  measure  examined  is  the  Operating  Cash  Flow  Ratio.    The  Operating   Cash  Flow  Ratio  data  for  the  10  year  period  is  as  follows.   Operating Cash Flow Ratio INTC AMD TXN Industry 2004 1.6 0.6 1.6 1.3 2005 1.6 0.8 1.6 1.3 2006 1.2 0.5 1.2 1.0 2007 1.5 -0.1 2.2 1.2 2008 1.4 -0.3 2.2 1.1 2009 1.5 0.2 1.7 1.1 2010 1.8 -0.2 1.9 1.2 2011 1.7 0.2 0.9 1.0 2012 2013 1.5 1.5 -0.2 -0.1 1.0 1.2 0.7 0.9     38   2.5 2.0 1.5 INTC AMD 1.0 TXN Industry 0.5 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 -0.5     The  Operating  Cash  Flow  Ratio  is  a  very  conservative  gauge  of  a  company's  liquidity  in  the  short   term.    Using  cash  flow  versus  net  income  provides  a  better  indication  of  liquidity  since  net  income  can   include  non-­‐cash  items  which  cannot  be  used  to  pay  down  liabilities.    Specifically,  this  final  measure   focuses  on  the  ability  of  the  firm's  operations  to  generate  the  resources  needed  to  repay  its  current   liabilities.    As  shown  in  the  chart  above,  even  if  INTC's  cash  and  equivalents  as  well  as  accounts   receivable  were  gone,  INTC's  on-­‐going  business  operations  could  produce  enough  cash  to  pay  its   liabilities  over  the  next  year.   Debt  &  Coverage     For  Debt  &  Coverage,  three  ratios  are  investigated:    Debt  to  Assets,  Debt  to  Equity  and   Interest  Coverage.    The  Debt  to  Assets  ratio  data  for  the  10  year  period  is  shown  below.   Debt to Assets INTC AMD TXN Industry 2004 0.2 0.5 0.2 0.3 2005 0.3 0.5 0.2 0.3 2006 0.2 0.5 0.2 0.3 2007 0.2 0.7 0.2 0.4 2008 0.2 1.0 0.2 0.5 2009 0.2 0.8 0.2 0.4 2010 0.2 0.8 0.2 0.4 2011 0.4 0.7 0.5 0.5 2012 0.4 0.9 0.5 0.6 2013 0.4 0.9 0.4 0.6     39   1.2 1.0 0.8 INTC AMD 0.6 TXN Industry 0.4 0.2 0.0 2005   2006 2007 2008 2009 2010 2011 2012 2013   Debt  to  Assets  provides  insight  on  how  leveraged  a  company  is  by  defining  the  total   amount  of  debt  relative  to  total  assets.    This  point-­‐of-­‐view  enables  comparisons  of  leverage   across  different  companies.    The  higher  the  ratio,  the  higher  the  degree  of  leverage,  and   consequently,  higher  financial  risk.    For  lenders,  this  also  provides  insight  into  assets  that  could   be  sold  to  cover  liabilities  if  liquidation  was  required.    As  can  be  seen  in  the  above  chart,  INTC  is   not  as  leveraged  as  other  firms  in  the  industry  and  has  over  2.5  times  the  assets  required  to   cover  liabilities.    Of  note  is  the  Debt  to  Assets  increase  starting  in  2011.    This  is  primarily   associated  with  an  increase  in  long-­‐term  debt  ($2  billion  (2010)  to  $13  billion  (2012))  related  to   company  acquisitions.    Over  the  same  time,  assets  increased  from  $63  billion  to  $84  billion.     Next,  the  Debt  to  Equity  Ratio  data  for  the  10  year  period  is  as  follows.   Total Debt / Common Equity INTC AMD TXN Industry 2004 0.2 1.0 0.2 0.5 2005 0.3 1.0 0.3 0.5 2006 0.3 1.2 0.2 0.6 2007 0.3 2.5 0.3 1.0 2008 0.3 86.2 0.3 28.9 2009 0.3 4.2 0.2 1.6 2010 0.3 3.9 0.3 1.5 2011 0.5 2.1 0.8 1.1 2012 0.6 6.4 0.8 2.6 2013 0.5 7.0 0.7 2.7     40   8.0 7.0 6.0 5.0 INTC AMD 4.0 TXN Industry 3.0 2.0 1.0 0.0 2005   2006 2007 2008 2009 2010 2011 2012 2013   The  Debt  to  Equity  Ratio  is  a  measure  of  a  firm's  financial  leverage  calculated  by  dividing   total  liabilities  by  stockholders'  equity.    The  ratio  indicates  what  proportion  of  equity  and  debt   the  firm  is  using  to  finance  its  assets.    A  high  debt  to  equity  ratio  generally  means  a  company   has  been  aggressive  in  financing  its  growth  with  debt  versus  retained  earnings.    This  can  result   in  pressure  on  earnings  as  a  result  of  the  additional  interest  expense  on  the  debt.    On  the  other   hand,  if  debt  is  used  to  finance  increased  operations,  the  firm  could  potentially  generate  more   earnings  than  it  would  have  without  the  financing.    If  the  increased  operations  were  to  increase   earnings  by  a  greater  amount  than  the  interest  on  the  debt,  then  the  shareholders  would   benefit  as  more  earnings  are  being  spread  among  the  same  amount  of  shareholders.    This  is  the   case  for  INTC.    As  can  be  seen  in  the  above  chart,  the  INTC  Debt  to  Equity  Ratio  increases  in   2011.    This  increase  is  associated  with  total  liabilities  going  from  $13  billion  to  $33  billion.     However,  over  the  same  period  of  time,  net  sales  increased  $10  billion  and  gross  profit   increased  $7  billion.     Finally,  the  Interest  Coverage  Ratio  data  for  the  10  year  period  is  as  follows.     41   Interest Coverage 2004 INTC AMD TXN Industry 2005 2006 2007 2008 2009 2010 2011 2012 2013 205.8 643.7 258.6 589.7 1208.0 99.3 119.4 93.9 44.4 25.6 1.9 1.8 2.9 -3.1 -2.6 -1.2 2.5 2.8 0.2 0.5 0.7 0.6 0.4 0.3 0.4 0.4 0.2 0.3 0.6 0.5 69.5 215.3 87.3 195.6 401.9 32.9 40.7 32.3 15.0 8.8   1400 4 3 1200 2 1000 1 INTC 800 Industry 0 AMD 600 TXN -1 400 -2 200 -3 0 -4 2005   2006 2007 2008 2009 2010 2011 2012 2013   This  ratio  indicates  the  dollars  of  cash  generated  by  operations  for  each  dollar  of   required  interest  payment.    This  ratio  is  almost  not  comparable.    Intel  has  so  much  cash,  its   ratio  had  to  be  put  on  a  different  axis  so  AMD  and  TXN  could  be  seen.    Further,  Intel's  high  ratio   skews  the  industry  average.    It  goes  without  saying,  Intel  generates  more  than  enough  cash  to   cover  its  long-­‐term  debt  interest  payments.   Sustainable  Growth     The  Sustainable  Growth  data  for  the  10  year  period  is  as  follows.   Sustainable Growth Rate INTC AMD TXN Industry 2004 2005 NA 18% NA 5% NA 17% NA 13% 2006 2007 2008 2009 7% 11% 7% 3% -4% -77% -213% 107% 36% 21% 14% 9% 13% -15% -64% 40% 2010 17% 57% 26% 33% 2011 2012 2013 18% 14% 9% 38% -111% -15% 15% 9% 9% 24% -30% 1%     42   150% 100% 50% 0% 2005 -50% 2006 2007 2008 2009 2010 2011 2012 2013 INTC AMD TXN Industry -100% -150% -200% -250%     Sustainable  Growth  Rate  is  the  rate  at  which  a  firm  can  grow  while  keeping  its   profitability  and  financial  policies  unchanged.    A  firm's  Return  on  Equity  and  its  dividend  payout   policy  determine  the  pool  of  funds  available  for  growth.    The  sustainable  growth  rate  provides  a   benchmark  against  which  a  firm's  growth  plans  can  be  evaluated.    As  can  be  seen  in  the  above   chart,  INTC's  Sustainable  Growth  Rate  is  positive  across  the  entire  timeframe  unlike  AMD,   which  has  a  lot  of  volatility.    INTC's  average  Sustainable  Growth  Rate  over  this  timeframe  is  a   healthy  12%.   Forecasting     This  section  covers  a  quantitative  way  to  summarize  what  has  been  learned  through  the   previous  sections  of  business  strategy  analysis,  accounting  analysis  and  financial  analysis.     Further,  this  summary  is  presented  in  terms  of  a  forward-­‐looking  view  on  which  to  base   financial  decisions.    The  overall  approach  to  making  these  estimates  is  to  extrapolate  historical   data  as  well  as  ratios,  and  then  adjust  that  data  based  on  known  mathematical  behaviors  (i.e.,   mean  reverting),  industry  trends  and  company  outlook  as  reflected  in  the  company's  financial   statements.    These  elements  are  combined  to  make  a  5-­‐year  forecast  on  key  financials  for  Intel.     43   Sales     The  Sales  Forecast  will  be  based  on  Intel's  sales  data  for  the  last  10  years.    The  sales  data   along  with  Intel's  competitors  is  shown  in  the  chart  below.    The  chart  suggests  Intel  had  growth   $60,000 $50,000 millions $40,000 INTC $30,000 AMD TXN $20,000 $10,000 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013   of  about  5%  per  annum  over  the  10  year  period.    However,  this  growth  is  primarily  attributed  to   acquisitions  in  the  2010-­‐2011  timeframe.    Intel's  existing  operations  are  likely  to  be  consistent   with  industry  trends  which  is  flat  as  seen  in  the  historical  sales  for  TXN  and  AMD34.    While   future  Intel  acquisitions  cannot  be  predicted,  it  is  likely,  given  Intel's  large  amount  of  cash  ($22   billion)  and  their  high  profit  margins  (18%),  which  will  generate  more  cash  in  the  future.    Due  to   Intel's  dominance  in  the  areas  where  it  operates,  acquisitions  are  really  its  only  means  of   significant  revenue  growth.    Intel's  continued  interest  in  cloud  computing  and  big  data  suggests   these  are  likely  the  segments  Intel  will  target.    Based  on  an  assumption  of  continued  growth   through  acquisitions,  a  conservative  assessment  is  that  Intel's  growth  over  the  next  5  years  will   follow  a  trend  similar  to  the  last  10  years  of  annual  growth  or  5%  per  annum.    Similarly,  TXN   and  AMD  will  grow  at  less  than  1%  per  a  year  as  shown  in  the  following  table  and  chart.                                                                                                                           34­‐annual-­‐report/2013/10K/26-­‐Overview.html     44   2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sales INTC $34,209 $38,826 $35,382 $38,334 $37,586 $35,127 $43,623 $53,999 $53,341 $52,708 $55,301 $58,022 $60,877 $63,873 $67,015 AMD $5,001 $5,848 $5,649 $6,013 $5,808 $5,403 $6,494 $6,568 $5,422 $5,299 $5,333 $5,367 $5,402 $5,437 $5,472 TXN $12,580 $13,392 $14,195 $13,835 $12,501 $10,427 $13,966 $13,697 $12,690 $12,205 $12,164 $12,123 $12,083 $12,042 $12,002   $80,000 $70,000 $60,000 millions $50,000 INTC $40,000 AMD TXN $30,000 $20,000 $10,000 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018   Income     With  a  5-­‐year  sales  estimate,  an  income  estimate  can  also  be  forecasted.    First  however,   a  number  of  assumptions  need  to  be  made.    These  assumptions  concern  financial  data   elements  related  to  Cost  of  Goods  Sold,  Selling,  General  &  Admin.  Expenses,  Depreciation,   Depletion  &  Amortization,  Interest  Expense,  Non-­‐Operating  Income/Expense,  any  Special  Items   and  Income  Taxes.    Similar  to  the  Sales  estimates,  forecast  assumptions  for  these  data  elements   will  be  based  on  historical  company  data  and  historical  industry  data,  as  well  as  any  relevant   insights  form  the  Intel  financial  statements.    First,  to  establish  a  baseline,  each  of  these   historical  data  elements  are  compared  to  the  sales  in  the  same  year  as  shown  in  the  chart   below.     45   60,000 50,000 40,000 Sales (Net) Cost of Goods Sold Selling, General & Admin. Expenses 30,000 Depreciation, Depletion & Amortization Interest Expense 20,000 Non-Operating Income/Expense Special Items Income Taxes - Total 10,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -10,000     From  the  above  chart,  it  can  be  seen  that  all  the  variables  seem  roughly  correlated  to   sales  except  Non-­‐Operating  Income/Expense  and  Special  Items.    To  examine  these  numbers   further,  they  are  normalized  relative  to  the  sales  numbers,  yielding  the  table  below  along  with   averages  for  Intel's  competitors.   Sales (Net) Cost of Goods Sold Selling, General & Admin. Expenses Depreciation, Depletion & Amortization Interest Expense Non-Operating Income/Expense Special Items Income Taxes - Total Cost of Goods Sold Selling, General & Admin. Expenses Depreciation, Depletion & Amortization Interest Expense Non-Operating Income/Expense Special Items Income Taxes - Total   2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 34,209 38,826 35,382 38,334 37,586 35,127 43,623 53,999 53,341 52,708 9,591 11,295 12,354 13,535 12,123 10,549 10,201 13,983 12,976 13,446 9,466 10,833 11,969 11,156 11,180 10,887 12,785 16,020 18,205 18,699 4,860 4,468 4,852 4,798 4,619 5,052 4,638 6,064 7,522 8,032 50 19 24 15 8 87 134 191 330 490 277 539 725 965 -248 80 591 331 565 -102 -140 160 -629 -1,722 -2,928 -411 -291 2,901 3,946 2,024 2,190 2,394 1,335 4,581 4,839 3,868 2,991 .280 .291 .349 .353 .323 .300 .234 .259 .243 .255 .289 0.414 0.455 .277 .279 .338 .291 .297 .310 .293 .297 .341 .355 .308 0.267 0.419 .142 .115 .137 .125 .123 .144 .106 .112 .141 .152 .130 0.092 0.139 .001 .000 .001 .000 .000 .002 .003 .004 .006 .009 .003 #N/A 0.041 464 464 464 464 464 464 464 464 464 464 464 102 -38 -630 -630 -630 -630 -630 -630 -630 -630 -630 -630 -630 -83 -210 .085 .102 .057 .057 .064 .038 .105 .090 .073 .057 .073 0.055 0.004 810 -240 Averages INTC TXN AMD   From  this  table,  the  first  thing  that  can  be  seen  is  the  values  for  Intel  are  consistent  with   the  industry  numbers  based  on  Intel's  place  in  the  industry  as  a  leader  (i.e.,  Intel's  lower  cost  of   goods  sold  as  a  lead  manufacturer).    However,  treating  all  the  items  as  a  percentage  of  sales   may  not  be  the  best  approach.    For  example,  as  sales  go  up  and  scale  is  achieved,  cost  of  goods   should  logically  go  down.    Based  on  this  logic,  Cost  of  Goods  Sold,  Selling,  General  &  Admin.     46   Expenses,  Depreciation,  Depletion  &  Amortization  assumptions  will  be  based  on  a  5-­‐year   extrapolation  of  the  last  10-­‐years  of  data.    Further,  interest  expense  will  be  based  on  the  most   recent  year  (2013)  due  its  climbing  value.    Its  uncertain  how  high  it  will  climb,  however,  Intel   has  enough  cash  ($22B)  to  cover  the  current  outstanding  debt.    The  Non-­‐Operating   Income/Expense  and  Special  Items  will  be  based  on  the  average  over  the  last  10-­‐years  for  these   respective  items.    Finally,  Income  Taxes  will  be  based  on  a  percentage  of  Sales.    The   combination  of  these  yield  the  following  Intel  income  forecast.   2004 Sales (Net) Cost of Goods Sold GROSS PROFIT Selling, General & Admin. Expenses OPERATING INCOME BEFORE DEPREC Depreciation, Depletion & Amortization OPERATING INCOME AFTER DEPREC Interest Expense 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 34,209 38,826 35,382 38,334 37,586 35,127 43,623 53,999 53,341 52,708 55,301 58,022 60,877 63,873 67,015 9,591 11,295 12,354 13,535 12,123 10,549 10,201 13,983 12,976 13,446 13,403 13,573 13,727 13,864 13,980 24,618 27,531 23,028 24,799 25,463 24,578 33,422 40,016 40,365 39,262 41,899 44,450 47,150 50,009 53,035 9,466 10,833 11,969 11,156 11,180 10,887 12,785 16,020 18,205 18,699 18,773 20,030 21,366 22,784 24,291 15,152 16,698 11,059 13,643 14,283 13,691 20,637 23,996 22,160 20,563 23,126 24,420 25,785 27,225 28,744 4,860 4,468 4,852 4,798 4,619 5,052 4,638 6,064 7,522 8,032 7,390 7,794 8,220 8,669 9,142 10,292 12,230 6,207 8,845 9,664 8,639 15,999 17,932 14,638 12,531 15,736 16,625 17,564 18,556 19,602 603 50 19 24 15 8 87 134 191 330 490 498 522 548 575 277 539 725 965 -248 80 591 331 565 810 464 464 464 464 464 -102 -140 160 -629 -1,722 -2,928 -411 -291 -240 -630 -630 -630 -630 -630 PRETAX INCOME 10,417 12,610 7,068 9,166 7,686 5,704 16,045 17,781 14,873 12,611 14,144 15,009 15,923 16,887 17,905 Income Taxes - Total 2,901 3,946 2,024 2,190 2,394 1,335 4,581 4,839 3,868 2,991 4,017 4,214 4,422 4,639 4,868 NET INCOME (Loss) 7,516 8,664 5,044 6,976 5,292 4,369 11,464 12,942 11,005 9,620 10,127 10,795 11,501 12,248 13,037 Non-Operating Income/Expense Special Items     Based  on  4.9  billion  shares  outstanding,  this  represents  an  earnings  per  share  (EPS)  increase   from  $1.93  (2013)  to  $2.62  (2018)  or  an  increase  of  35.5%.    In  other  words,  based  on  a  stock  price  per  a   share  of  $26,  the  2013  full  year  EPS  represents  a  Price-­‐to-­‐Earnings  ratio  of  13.5,  while  the  future-­‐year   Price-­‐to-­‐Earnings  ratio  is  9.9.    These  values  seem  conservative  given  that  analyst  are  projecting  an  EPS  in   the  range  of  $1.77  to  $2.46  in  2  years  for  Dec  201535.    Finally,  an  assumption  can  be  made  that  as  an   Industry  leader,  Intel's  sales  and  earnings  will  never  be  less  than  the  Industry  average,  which  is  expected   to  grow  at  3.4%  and  2.3%  respectively  for  the  semiconductor  industry.    Using  this  assumption  as  a  lower   bound,  a  sales  and  earnings  best  and  worst  case  forecast  can  be  derived  as  shown  in  the  chart  below.                                                                                                                           35­‐estimates     47   $80,000 $70,000 $60,000 millions $50,000 INTC Sales Forecast (Best & Worst Case) $40,000 INTC Earnings Forecast (Best & Worst Case) $30,000 $20,000 $10,000 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018   Balance  Sheet     In  order  for  Intel  to  generate  these  increased  sales  and  resulting  earnings,  Intel  will  need   the  assets  to  support  the  forecasted  sales.    If  Intel  requires  additional  assets  to  support  revenue   growth,  it  will  require  additional  resources  to  purchase  the  new  assets.    These  funds  can  come   from  internal  sources,  from  the  sale  of  short-­‐term  investments,  from  taking  loans  or  issuing   debt,  or  from  issuing  stock.    This  section  explores  if  Intel  has  adequate  resources  to  source  this   growth  internally.    The  two  key  variables  that  will  be  explored  are  Working  Capital  and  Plant,   Property  &  Equipment.    The  combination  of  these  will  need  to  scale  as  sales  grow.    The  key   question  is  whether  or  not  Intel  will  generate  enough  cash  to  meet  the  required  increase  in   Working  Capital  and  to  cover  the  cost  of  Plant,  Property  &  Equipment.   2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sales (Net) 34,209 38,826 35,382 38,334 37,586 35,127 43,623 53,999 53,341 52,708 Net Operating Working Capital 16,742 13,483 11,095 13,844 10,186 12,388 19,842 12,764 16,278 16,753 Plant, Property & Equipment (Gross) 39,833 44,132 47,084 46,052 48,088 47,822 50,481 58,073 66,046 73,416 .489 .347 .314 .361 .271 .353 .455 .236 .305 .318 .345 Plant, Property & Equipment (Gross) 1.164 1.137 1.331 1.201 1.279 1.361 1.157 1.075 1.238 1.393 1.234 NET INCOME (Loss) 7,516 8,664 5,044 6,976 5,292 4,369 11,464 12,942 11,005 9,620 Net Operating Working Capital Ave     48     Using  the  historical  Working  Capital  and  Plant,  Property  &  Equipment  to  Sales  10-­‐year   averages,  shown  above,  a  forecast  for  Working  Capital  and  Plant,  Property  &  Equipment  can  be   made.    The  forecasts  are  shown  on  the  following  table.   2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sales (Net) 34,209 38,826 35,382 38,334 37,586 35,127 43,623 53,999 53,341 52,708 55,301 58,022 60,877 63,873 67,015 Net Operating Working Capital 16,742 13,483 11,095 13,844 10,186 12,388 19,842 12,764 16,278 16,753 19,075 20,014 20,998 22,032 23,116 Plant, Property & Equipment (Gross) 39,833 44,132 47,084 46,052 48,088 47,822 50,481 58,073 66,046 73,416 68,229 71,586 75,108 78,804 82,681 7,516 8,664 5,044 6,976 5,292 4,369 11,464 12,942 11,005 9,620 10,127 10,795 11,501 12,248 13,037 NET INCOME (Loss)     In  other  words,  Working  Capital  needs  to  increase  by  $6.3B  over  the  next  5  years  to   support  the  forecasted  sales.    Further,  Plant,  Property  &  Equipment  needs  to  increase  by  $9.3B.     Together  this  amounts  to  $15.6B  that  is  required  over  the  next  5  years  to  support  forecasted   sales.    While  this  is  a  significant  amount  of  money,  during  this  time,  Intel  will  generate  over   $57B  in  net  income.    Even  if  Intel's  current  cash  hoard  of  over  $22B  did  not  exist,  Intel  could   easily  satisfy  future  asset  funding  demands  internally.   Valuation     In  this  section,  Intel's  value  is  estimated  to  determine  if  the  firm  is  over,  under  or  fairly   valued  compared  to  the  current  share  price.    A  number  of  value  estimation  techniques  are  used   since  each  method  frames  the  valuation  task  differently  and  can  highlight  different  issues   regarding  Intel's  business  practices.    Further,  each  valuation  technique  requires  differing  levels   of  structure  and  assumptions.    No  one  technique  is  perfect,  but  cumulatively  they  provide  a   good  indication  of  a  company's  value.    The  techniques  that  will  be  used  are  valuation  based  on   Price  Multiples,  Discounted  Free  Cash  Flow,  Discounted  Abnormal  Earnings,  Discounted   Abnormal  Return  on  Equity  and  Earnings  Growth.     49   Price  Multiples     Under  this  approach,  several  forecasts  of  performance  are  converted  into  a  value  by   applying  a  price  multiple  derived  from  the  industry  average.    This  approach  relies  on  the  market   to  determine  the  prospects  for  a  company  and  assumes  the  industry  average  is  applicable  to   the  firm  being  evaluated.    This  technique  is  also  subject  to  non-­‐company  related  market  events   such  as  a  'flash  crash'  meaning  the  estimated  value  could  change  significantly  day-­‐to-­‐day.    The   primary  advantage  of  this  technique  is  its  simplicity.    The  three  multiples  used  for  this  valuation   technique  are  Price-­‐to-­‐Sales,  Price-­‐to-­‐Earnings  and  Price-­‐to-­‐Operating  Cash  Flow.    Although  any   financial  variable  could  have  been  chosen,  these  seem  to  be  the  most  common.    The   corresponding  data  for  Intel  and  two  competitors  is  shown  below  along  with  averages  for  the   multiples.    It  should  be  noted,  the  AMD  data  was  not  used  in  the  averages  due  to  its  results   looking  like  outliers,  which  highlights  the  downside  of  this  technique  in  trying  to  find   appropriate  companies  to  be  used  for  comparison.   as of 12/31/2013 ($m) Share Price Shares Outstanding Sales Net Income Operating Cash Flow Price-to-Sales Price-to-Earnings Price-to-Operating Cash Flow   INTC $25.96 4,970 $52,708 $9,620 $20,776 2.45 13.41 6.21 AMD $3.87 754 $5,299 -$83 -$148 0.55 -35.16 -19.72 TXN $43.91 1,098 $12,205 $2,162 $3,384 Average 3.95 3.20 22.30 17.85 14.25 10.23   The  multiples  are  then  used  along  with  the  forecasted  sales,  net  income  and  operating   cash  flow  for  2023  to  project  the  2023  price.    Each  multiple  results  in  a  different  forecasted   price,  so  all  are  averaged  to  derive  the  overall  forecast  for  this  technique  as  shown  below.     50   Forecasted Values ($m) Sales Net Income Operating Cash Flow 2023 2023 Price $77,870 $50.12 $15,042 $54.04 $26,860 $55.28 $53.14 Average $18.31 Sum of dividends paid over 10 years $71.45 Total Value   Discounted  Free  Cash  Flow     The  purpose  of  the  Discounted  Free  Cash  Flow  model  is  to  estimate  the  money  one   would  receive  from  an  investment  adjusted  for  the  time  value  of  money.    The  model  uses   future  free  cash  flow  projections  and  discounts  them  using  the  weighted  average  cost  of  capital   to  arrive  at  a  present  value.    Thus,  the  first  step  is  to  evaluate  the  weighted  average  cost  of   capital  for  Intel.    The  total  current  debt  carried  by  Intel  is  shown  in  the  following  table  along   with  the  interest  rate  on  the  debt.    Based  on  Intel's  10-­‐year  average  tax  rate  of  27.17%,  Intel's   tax-­‐shield  adjusted  weighted  average  cost  of  capital  is  2.10%.   Debt ($Billions) Bond Coupons 1.35% $2,997 2.70% $1,494 4.00% $744 4.25% $924 1.95% $1,499 3.30% $1,996 4.80% $1,490 3.25% $1,075 2.95% $946 Total $13,165   Weight 10.7% 10.6% 7.8% 10.4% 7.7% 17.4% 18.9% 9.2% 7.4% 100.0% 2.88% WACC Pre-tax adjusted 27.17% 10 year average Tax Rate 2.10% WACC Tax Shield Adjusted   This  model  is  based  on  a  number  of  assumptions  that  come  from  a  number  of  different   sources  to  include  forecasts.    The  assumptions  used  in  the  Discounted  Free  Cash  Flow  model  to   value  Intel  are  as  follows:     51   Current Inputs (millions) Enter the current revenues of the firm = Enter current capital invested in the firm = Enter the current depreciation = Enter the current capital expenditures for the firm = Enter the change in Working Capital in last year = Enter beginning shareholder's equity Enter the value of current debt outstanding = Enter the number of shares outstanding = Free Cash Flow For The Firm Valuation Assumptions source $ 52,708 Intel as of 31 Dec 2013 $ 71,421 Intel BV of Equity ($58.256B) + BV of debt ($13.165B) as of 31 Dec 2013 $ 8,032 Intel Depreciation, Depletion & Amortization as of 31 Dec 2013 $ 10,711 Intel as of 31 Dec 2013 $ 56 Intel as of 31 Dec 2013 (Working Capital = Current Assets - Current Liabilities) $ 58,256 Intel as of 31 Dec 2013 $ 13,165 Intel as of 31 Dec 2013 4,970 Intel as of 31 Dec 2013 High Growth Period Assumptions source Enter the growth rate in revenues for the next 5 years = 4.92% Based on group project Intel forecasts What will all operating expenses be as a % of revenues in the fifth year? 73.28% Based on group project Intel forecasts How much debt do you plan to use in financing investments? 18% Intel percentage as of 31 Dec 2013 Enter the growth rate in capital expenditures & depreciation 5.31% Extrapolation based on last 10 years of Intel Capital Expenditure data Enter working capital as a percent of revenues 35.13% Intel as of 31 Dec 2013 Enter the tax rate that you have on corporate income 27.17% Intel 10 year (2004-2013) average Tax Rate What beta do you want to use to calculate cost of equity = 0.93 INTC beta as of 20 Apr 2014 (source: Enter the current long term bond rate = 3.45% US Treasury Bonds Rates (source: as of 24 Apr 2014) Enter the market risk premium you want to use = 4.96% Implied Premium (source: as of 5 Jan 2014) Enter your cost of borrowing money = 2.10% Intel tax shield adjusted weighted average debt interest rate as of 31 Dec 2013 Stable Period Enter the growth rate in revenues = 3.44% Semiconductor Industry growth from 2004-2013 Enter operating expenses as a % of revenues in stable period = 76.08% Based on Intel average from 2004-2009 Enter capital expenditures as a percent of depreciation in this period 105.75% Based on Intel average from 2004-2009 How much debt do you plan to use in financing investments? 4.30% Based on Intel average from 2004-2009 Enter interest rate of debt in stable period = 2.10% Using same as high growth period due to creditworthiness of Intel What beta do you want to use in the stable period =   0.74 Based on Semiconductor sector beta as of 24 Apr 2014 (source:   The  present  value  of  the  next  10  years  of  cash  flows  to  include  the  terminal  value  in  the   10th  year  is  as  follows:   ESTIMATED CASHFLOWS Base Growth in Revenue Growth in Deprec'n Revenues Operating Expenses 2 3 4 5 6 7 8 9 10 4.92% 4.92% 4.92% 4.92% 4.92% 4.62% 4.33% 4.03% 3.74% 3.44% 5.31% $ 52,708 - $ Operating Expenses $ EBIT $ % of Revenues Tax Rate   1 $ 55,301 38,626 $ 14,082 $ 73.28% 5.31% $ 58,022 40,526 $ 14,775 $ 73.28% 27.17% 5.31% $ 60,877 42,520 $ 15,502 $ 73.28% 27.17% 5.31% $ 63,873 44,612 $ 16,265 $ 73.28% 27.17% 5.31% $ 67,015 46,807 $ 17,065 $ 73.28% 27.17% 4.94% $ 70,114 49,110 $ 17,905 $ 73.28% 27.17% 4.56% $ 73,149 51,774 $ 18,340 $ 73.84% 27.17% 4.19% $ 76,098 54,424 $ 18,724 $ 74.40% 27.17% 3.81% $ 78,940 57,045 $ 19,053 $ 74.96% 27.17% 3.44% $ 81,655 59,618 $ 62,125 19,322 $ 19,530 75.52% 27.17% 76.08% 27.17% 27.17% Ending equity $ 68,512 $ 79,273 $ 90,563 $ 102,408 $ 114,837 $ 127,877 $ 141,234 $ 154,871 $ 168,747 $ 182,819 $ 197,042 EBIT (1-t) $ 10,256 $ 10,761 $ 11,290 $ 11,846 $ 12,428 $ 13,040 $ 13,357 $ 13,637 $ 13,876 $ 14,072 $ 14,223 + Depreciation $ 8,032 $ 8,459 $ 8,908 $ 9,382 $ 9,880 $ 10,405 $ 10,919 $ 11,418 $ 11,896 $ 12,350 $ 12,774 - Capital Expenditures $ 10,711 $ 11,280 $ 11,880 $ 12,511 $ 13,176 $ 13,876 $ 13,802 $ 13,729 $ 13,656 $ 13,582 $ 13,509 - Change in WC $ 56 $ 911 $ 956 $ 1,003 $ 1,052 $ 1,104 $ 1,089 $ 1,066 $ 1,036 $ 999 $ 954 = FCFF $ 7,521 $ 7,028 $ 7,363 $ 7,714 $ 8,081 $ 8,465 $ 9,385 $ 10,259 $ 11,080 $ 11,841 $ 12,535 Terminal Value (in 2023): $ 376,824   Correspondingly,  the  cost  of  equity  and  capital  along  with  the  value  of  the  firm  by  year   is  shown  in  the  following  tables.     52   COSTS OF EQUITY AND CAPITAL 1 2 4 5 6 7 8 9 10 8.06% 8.06% 8.06% 8.06% 8.06% 7.87% 7.69% 7.50% 7.31% 7.12% Proportion of Equity 81.57% 81.57% 81.57% 81.57% 81.57% 84.39% 87.22% 90.05% 92.87% 95.70% After-tax Cost of Debt 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% Proportion of Debt 18.43% 18.43% 18.43% 18.43% 18.43% 15.61% 12.78% 9.95% 7.13% 4.30% Cost of Capital 6.86% 6.86% 6.86% 6.86% 6.86% 6.88% 6.90% 6.90% 6.90% 6.88% Cumulative WACC 106.86% 114.19% 122.02% 130.39% 139.33% 148.92% 159.19% 170.18% 181.92% 194.44% Cumulative Cost of Equity 108.06% Present Value $ 6,577 116.78% $ 2014 Value of Firm by year $   3 Cost of Equity 6,448 126.19% $ 2015 6,322 136.37% $ 2016 6,198 147.36% $ 2017 6,076 158.96% $ 171.18% 6,076 2018 $ 2019 6,445 184.02% $ 2020 6,511 197.47% $ 2021 6,509 211.53% $ 2022 200,249   2023 257,410 $ 268,035 $ 279,055 $ 290,480 $ 302,321 $ 314,589 $ 327,197 $ 339,511 $ 351,868 $ 364,295 $ Value of Debt $ 47,448.20 $ 49,407 $ 51,438 $ 53,544 $ 55,727 $ 49,095 $ 41,813 $ 33,788 $ 25,071 $ 15,658   The  resulting  share  price  value  of  Intel  including  dividends  is  $67.45  as  detailed  below:   FIRM VALUATION Value of Firm $ 257,410 - Value of Debt $ 13,165 Value of Equity $ 244,245 Value of Equity per Share $ 49.14 Sum of dividends paid over 10 years $18.31 Total Value $67.45   Discounted  Abnormal  Earnings     Discounted  Abnormal  Earnings  is  a  method  for  determining  a  company's  worth  based  on   book  value  and  earnings.    Abnormal  earnings  arise  when  a  company  is  able  to  produce  earnings   that  exceed  a  capital  charge,  which  reflects  the  fact  that  there  is  a  cost  of  capital  and  investors   have  an  opportunity  cost  for  the  equity  invested  in  a  business.    The  assumptions  used  for  this   model  are  similar  to  the  ones  used  in  the  Discounted  Free  Cash  Flow.    The  resulting  share  price   value  of  Intel  including  dividends  is  $68.63  as  detailed  below:     53   Discounted Abnormal Earnings EBIT (1-t) $ - WACC (CI) Abnormal Earnings Terminal AE PV Base 10,256 $ Cost of Equity ROC Capital Invested Calculation of Capital Invested Initial $ + Net Cap Ex + Chg in WC Ending $ $ $ $ 71,421 71,421 Cumulated Cost of Equity 2014 1 10,761 5,759 5,002 4,681 $ $ $ $ 2015 2 11,290 6,059 5,231 4,581 $ $ $ $ 2016 3 11,846 6,376 5,470 4,483 $ $ $ $ 2017 4 12,428 6,709 5,719 4,386 $ $ $ $ 2018 5 13,040 7,060 5,980 4,292 $ $ $ $ 2019 6 13,357 7,255 6,102 4,097 $ $ $ $ 2020 7 13,637 7,387 6,250 3,926 $ $ $ $ $ 8.06% 15.07% 71,421 $ 8.06% 15.02% 75,153 $ 8.06% 14.98% 79,081 $ 8.06% 14.94% 83,213 $ 8.06% 14.89% 87,560 $ 7.87% 14.50% 92,135 $ 7.69% 14.19% 96,107 $ $ $ $ $ 71,421 2,821 911 75,153 75,153 2,971 956 79,081 79,081 3,129 1,003 83,213 83,213 3,295 1,052 87,560 87,560 3,471 1,104 92,135 92,135 2,883 1,089 96,107 96,107 2,311 1,066 99,484 $ $ $ $ 106.86% $ $ $ $ 114.19% 122.02% $ $ $ $ 130.39% $ $ $ $ $ $ $ $ 139.33% $ $ $ $ 148.92% FIRM VALUATION $207,198 PV of AE $71,421 + Capital Invested -$28,507 + PV of Chg Capital in Yr 10 $250,112 = Firm Value Indicated Price per share $50.32 $18.31 Sum of dividends paid over 10 years $68.63 Total Value $ $ $ $ 159.19% 2021 8 13,876 7,459 6,417 3,771 $ $ $ $ 7.50% 13.95% 99,484 $ 99,484 1,760 1,036 102,280 170.18% $ $ $ $ 2022 9 14,072 7,476 6,597 3,626 $ $ $ $ $ 2023 10 14,223 7,442 6,782 322,507 169,355 7.31% 13.76% 102,280 $ 7.12% 13.61% 104,511 102,280 1,232 999 104,511 104,511 734 954 106,199 $ $ $ $ 181.92% 194.44%     Discounted  Abnormal  Return  on  Equity     Abnormal  Return  on  Equity  (ROE)  is  a  company's  ROE  less  the  return  required  by  equity   investors.    Companies  with  positive  abnormal  ROE  are  able  to  invest  their  net  assets  to  create   value  for  shareholders.    If  new  equity  is  invested  in  positive  valued  projects,  the  company  will   increase  its  equity  value-­‐to-­‐book  multiple.    The  forecasted  Discounted  Abnormal  Return  on   Equity  for  Intel  is  shown  in  the  table  below.    The  resulting  share  price  value  of  Intel  including   dividends  is  $48.99.   Discounted Abnormal ROE Forecast ROE Cost of Equity Abnormal ROE Present Value of AROE Total DAROE Beginning Equity $ Firm Value $ Indicated value per share $ Sum of dividends paid over 10 years Total Value 2014 1 17.38% 8.06% 9.32% 8.63% 261.75% 58,256 152,484 30.68 $18.31 $48.99 2015 2 15.79% 7.55% 8.24% 7.12% 2016 3 14.53% 7.04% 7.49% 6.11% 2017 4 13.51% 6.53% 6.98% 5.42% 2018 5 12.67% 6.01% 6.65% 4.97% 2019 6 11.34% 5.50% 5.84% 4.24% 2020 7 10.55% 4.99% 5.56% 3.96% 2021 8 2022 9 9.88% 4.48% 5.40% 3.81% 9.29% 3.96% 5.33% 3.75% 2023 10 Terminal Year 8.78% 3.45% 5.33% 5.33% 3.79% 109.96%   Earnings  Growth  (Buffet’s  Model)     Warren  Buffett  is  considered  a  value  investor  and  seeks  businesses  whose  products  or   services  will  be  in  constant  and  growing  demand.    Specifically,  Buffett  seeks  out  consumer     54   monopolies  selling  products  in  which  there  is  no  effective  competitor,  either  due  to  a  patent  or   brand  name  or  similar  intangible  that  makes  the  product  unique.    Consumer  monopolies   typically  have  high  profit  margins  because  of  their  unique  position.    Intel  fits  this  description   with  one  of  the  best  known  brands  in  the  world  allowing  it  to  command  a  premium  for   products  resulting  in  operating  margins  and  net  profit  margins  above  industry  norms.    The   resulting  share  price  value  of  Intel  including  dividends,  under  the  Sustainable  Growth  Rate   model,  is  $102.27.   Buffett Valuation Worksheet (January/February 1998, Computerized Investing, Date of Analysis: 4/24/2014 Current Stock Data Company: Intel Ticker: INTC Price: $25.96 EPS: $1.94 DPS: $0.90 BVPS: $11.72 P/E: 13.4 Earnings Yield: 7.5% Dividend Yield: 3.5% P/BV: 2.2 Gv't Bond Yield: 3.5% Seven Year Averages Return on Equity: Payout Ratio: P/E Ratio-High: P/E Ratio-Low: WR DS P/E Ratio: WR DS Sustainable Growth WR DS (ROE * (1 - Payout Ratio)) source 18.5% 45.1% 18.0 11.3 14.7 10.2% US Treasury Bonds Rates (source: as of 24 Apr 2014)   Historical Company Data Price P/E Ratio Payout High** Low** High Low ROE Ratio Year 8 26.55 16.80 30.5 19.3 13.7% 46.0% Year 7 28.00 18.80 23.3 15.7 16.3% 37.5% Year 6 25.20 12.05 27.1 13.0 13.5% 58.9% Year 5 21.20 12.05 26.8 15.3 10.5% 70.9% Year 4 24.25 17.60 11.8 8.5 23.2% 30.6% Year 3 25.85 19.15 10.5 7.8 28.2% 31.8% Year 2 29.20 19.25 13.3 8.8 21.5% 39.5% Year 1 26.00 20.10 13.4 10.4 16.6% 46.4% Source: * Wharton Research Data Services ** EPS DPS BVPS High Price Low Price Annually Compounded Rates of Growth (7 year) [(Year 1 / Year 8) ^ (1/7)] - 1 12.1% 12.3% 9.2% -0.3% 2.6% Annually Compounded Rates of Growth (3 year) [(Year 1 / Year 4) ^ (1/3)] - 1 -2.0% 12.6% 9.6% 2.3% 4.5% Year 2006 2007 2008 2009 2010 2011 2012 2013 for 31 Dec 2013 Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 EPS* 0.87 1.20 0.93 0.79 2.06 2.46 2.20 1.94 Current Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 DPS* 0.40 0.45 0.55 0.56 0.63 0.78 0.87 0.90 BVPS* 6.34 7.35 6.90 7.50 8.90 8.73 10.25 11.72 Projected Company Data Using Historical Earnings Growth Rate EPS DPS $1.94 0.87 6.10 Earnings after 10 years 2.18 0.98 18.20 Sum of dividends paid over 10 years 2.44 1.10 2.74 1.23 $89.56 Projected price (Average P/E * EPS) 3.07 1.38 $107.76 Total gain (Projected Price + Dividends) 3.44 1.55 3.86 1.74 15.3% Projected return using historical EPS growth rate [(Total Gain / Current Price) ^ (1/10)] - 1 4.33 1.95 4.85 2.19 5.44 2.45 6.10 2.75       55   Projected Company Data Using Sustainable Growth Rate BVPS EPS DPS $11.72 2.17 0.98 5.72 Earnings after 10 years (BVPS * ROE) 12.91 2.39 1.08 18.31 Sum of dividends paid over 10 years 14.23 2.64 1.19 15.67 2.90 1.31 $83.97 Projected price (Average P/E * EPS) 17.27 3.20 1.44 $102.27 Total gain (Projected Price + Dividends) 19.03 3.52 1.59 20.96 3.88 1.75 14.7% Projected return using sustainable growth rate [(Total Gain / Current Price) ^ (1/10)] - 1 23.09 4.28 1.93 25.44 4.71 2.12 28.03 5.19 2.34 30.88 5.72 2.58 Year Current Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023     The  following  chart  compares  all  of  the  valuation  models  in  their  projection  of  Intel's   future  price.    These  models  suggest  Intel's  value,  including  dividends,  will  grow  by  6.56%  to   14.70%  a  year.   $120 $100 $80 Earnings Growth Multiples Discounted Abnormal Earnings $60 Free Cash Flow Discounted Abnormal ROE $40 $20 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022   2023 Assessment  Of  Solvency     While  the  previous  section  focused  on  firm  valuation  for  equity  investors,  another   important  perspective  is  from  the  view  of  a  potential  holder  of  company  debt.    Credit  analysis  is   the  evaluation  of  a  firm's  ability  to  repay  debt  and  associated  interest  payments  and  specifically   a  forecast  on  whether  a  firm  will  face  financial  distress.    Credit  analysis  of  Intel  is  the  focus  of   this  section.     56   Calculation  of  Altman  Z-­‐Score  Model   The  size  of  the  world  debt  market  is  $82.2  trillion  (2009)36.    Because  of  this  size  and  level     of  involvement  from  countries  to  hedge  funds  to  individual  investors,  a  number  of  stress   prediction  models  have  been  developed.    They  are  focused  on  predicting  whether  a  firm  will   face  distress  such  as  bankruptcy.    One  of  the  more  robust,  multifactor  models  is  known  as  the   Altman  Z-­‐score  model.    This  model  weights  five  important  factors  to  derive  a  bankruptcy  score.     The  formula  is  a  s  follows:   Altman  Z-­‐score  =  1.2  (X1)  +  1.4  (X2)  +  3.3  (X3)  +  0.6  (X4)  +  1.0  (X5)     where:     X1  =  net  working  capital  /  total  assets  (liquidity)     X2  =  retained  earnings  /  total  assets  (cumulative  profitability)     X3  =  EBIT  /  total  assets  (return  on  assets)     X4  =  market  value  of  equity  /  book  value  of  total  liabilities  (leverage)     X5  =  sales  /  total  assets  (sales  generating  potential  of  assets)     The  model  predicts  bankruptcy  when  Z  <  1.81  while  the  range  between  1.81  and  2.67  is   a  cautionary  area.    Below  is  Altman  Z-­‐score  data  for  Intel  and  two  of  its  competitors  (AMD  and   TXN)  over  the  last  10  years.    As  can  be  seen,  Intel  is  above  both  the  bankruptcy  cutoff  and  the   cautionary  area.    Of  note  however,  is  the  decrease  since  2010  which  corresponds  to  Intel  taking   on  debt  to  finance  acquisitions;  but  this  downward  trend  appears  to  have  hit  the  entire   industry.                                                                                                                           36     57     Estimate  of  Debt  Rating     Debt  Ratings  influence  the  yield  that  must  offered  to  sell  the  debt.    Thus,  debt  ratings   can  influence  the  ability  of  a  company  to  issue  debt  to  purchase  revenue  generating  assets.     Further,  a  high  yield  rate  on  the  debt  will  limit  the  earnings  available  to  shareholders.    One  of   the  major  debt  ratings  firms  is  Standard  &  Poor's.    They  rank  debt  from  AAA  (the  best)  to  D   (default).    The  ratings  are  highly  correlated  with  the  ability  of  the  firm  to  make  payments  on  the   debt  and  the  forecasted  ability  to  payback  the  debt.    Because  of  this,  debt  ratings  are  highly   correlated  to  earnings  and  cash  flow  as  well  as  the  amount  of  financial  leverage.    As  seen  in  the   Financial  Ratio  section,  earnings,  cash  flow  and  financial  leverage  can  be  tracked  using  various   ratios.    Some  of  the  ratios  with  strong  correlations  to  debt  ratings  are  shown  in  the  table  below.       58     Intel's  values  for  Earnings  before  interest  and  taxes  to  net  capital,  Pretax  interest   coverage,  Cash  flow  from  operations  to  total  debt,  and  Net  debt  to  net  capital  are  shown  in  the   following  table.    Each  measure  falls  into  a  different  rating  bin  from  the  category  table  above.     However,  based  on  this  data,  on  average,  Intel's  debt  rating  should  be  about  AA  (S&P).   Earnings before interest and and taxes to net capital Pretax interest coverage Cash flow from operations to total debt Net debt to net capital 2004 26.7% 208.3 1866.1% 1.8% 2005 33.8% 663.7 703.8% 5.8% 2006 16.9% 294.5 574.7% 5.0% 2007 20.7% 611.1 637.6% 4.6% 2008 24.7% 960.8 579.3% 4.8% 2009 20.7% 65.6 545.1% 4.9% 2010 32.4% 119.7 803.7% 4.2% 2011 39.1% 93.1 295.9% 15.4% 2012 28.6% 45.1 143.8% 25.7% 2013 21.5% 25.7 157.8% 22.6% Intel between A & BBB between AAA & AA between AAA & AA between AA & A   Actual  Bond  Rating   The  following  graphic37  identifies  the  Intel  bonds  currently  available  for  trade.    The     rating  column  indicates  S&P  currently  rates  the  credit  worthiness  of  Intel  debt  at  A+.       According  to  S&P,  "A"  means  a  strong  capacity  to  meet  financial  commitments,  but   somewhat  susceptible  to  adverse  economic  conditions  and  changes  in  circumstances38.    This  is   consistent  with  the  insights  from  the  industry  analysis  conducted  in  the  Strategic  Analysis   section;  specifically  that  the  semiconductor  industry  is  cyclical.                                                                                                                           37   38     59   Conclusion     The  semiconductor  industry  has  been  growing  for  over  40  years  with  industry  annual   revenues  of  over  $200  billion39.    The  semiconductor  industry  is  characterized  by  rapid   technological  innovation  and  no  one  does  innovation  like  Intel.    Intel  is  the  world's  fifth  most   valuable  brand  worth  $35  billion  and  its  microprocessors  drive  almost  90%  of  the  world's   personal  computers.    This  leadership  position  gives  Intel  more  latitude  to  invest  in  research  and   development,  which  translates  into  increased  efficiency  of  design  and  manufacturing.    Despite   this  strength,  Intel  is  susceptible  to  the  general  health  of  the  economy  which  dictates  demand   for  semiconductor  components.    However,  Intel  has  taken  steps  to  diversify  by  making   acquisitions  in  the  areas  of  security  solutions,  wireless  options  and  cloud  computing.     Intel  has  consistently  reported  strong  financial  numbers.    A  review  of  Intel's  financial   statements  suggest  the  firm  has  considerable  accounting  flexibility  that  could  potentially  be   used  to  distort  their  reported  numbers.    Specifically,  Intel  makes  extensive  use  of  subjective   judgments  on  the  valuation  of  non-­‐marketable  equity  investments  as  well  as  judgments  on  the   timing  of  revenue  recognition.    These  could  be  a  mechanism  to  smooth  earnings.    However,   Intel  is  very  forthcoming  about  the  extensive  use  of  subjective  estimates  in  their  financial   reporting.    Further,  their  accounting  practices  are  in  alignment  with  other  firms  in  the  industry.     Overall,  the  accounting  strategy  used  by  Intel  seems  to  accurately  represent  the  company’s   financial  activity  and  health.     Financial  metrics  paint  a  very  positive  picture  of  Intel's  performance  and  health.     Specifically,  on  profitability  metrics  such  as  Return  on  Equity,  Return  on  Assets,  Gross  Profit                                                                                                                           39­‐industry-­‐analysis-­‐and-­‐projections.jhtml     60   Margin  and  Profit  Margin,  Intel  performs  well  above  industry  averages  which  reflects  its  brand   value  allowing  it  to  command  a  premium  for  its  products.    Regarding  liquidity,  Intel  is  also   strong.    The  Current  Ratio,  Quick  Ratio  and  Operating  Cash  Flow  Ratio  all  suggest  Intel  has  a   healthy  ability  to  cover  liabilities.    Likewise,  Intel  is  well  positioned  to  make  payments  and  pay   down  its  debt.    The  only  area  of  caution  with  regard  to  financial  metrics  concerns  Asset   Turnover.    For  this  metric,  Intel  is  below  Industry  averages.    While  this  seems  at  odds  with  the   rest  of  the  financial  metrics,  as  noted  in  the  Strategy  section,  Intel  dominates  the   semiconductor  industry  through  a  strategy  of  differentiation  where  the  company  spends  over   $5  billion  a  year  on  research  and  development.    Additionally,  Intel  is  a  semiconductor   manufacturing  powerhouse.    The  combination  of  these  suggest  that  it  is  expensive  to  be  and   stay  at  the  top.     The  financial  metrics  suggest  Intel  has  had  strong  growth  over  the  last  10  years.    Based   on  forecasts,  Intel  looks  poised  to  continue  this  growth.    Due  to  its  dominance  in  the  areas   where  it  operates,  acquisitions  are  really  Intel's  only  means  for  significant  revenue  growth.     Based  on  an  assumption  of  continued  growth  through  acquisitions,  a  conservative  assessment   is  that  Intel's  growth  over  the  next  5  years  will  follow  a  trend  similar  to  the  last  10  years  of   annual  growth  or  5%  per  annum.    In  a  similar  manner,  earnings  will  continue  an  advancing   trend  as  well.    Based  on  4.9  billion  shares  outstanding,  earnings  per  share  is  forecasted  to   increase  from  $1.93  (2013)  to  $2.62  (2018)  or  an  increase  of  35.5%.    Finally,  in  order  for  Intel  to   generate  these  increased  sales  and  resulting  earnings,  Intel  will  need  the  assets  to  support  the   forecasted  sales  and  subsequent  earnings.    To  meet  these  forecasts,  Intel  needs  Working   Capital  to  increase  by  $6.3B  over  the  next  5  years.    Further,  Plant,  Property  &  Equipment  needs     61   to  increase  by  $9.3B.    Together  this  amounts  to  $15.6B  that  is  required  over  the  next  5  years.     While  this  is  a  significant  amount  of  money,  during  this  time,  Intel  will  generate  over  $57B  in   net  income.    Even  if  Intel's  current  cash  hoard  of  over  $22B  did  not  exist,  Intel  could  easily   satisfy  future  asset  funding  demands  internally.     Increases  in  forecasted  sales  and  earnings  would  indicate  Intel  is  a  value  relative  to  its   current  share  price.    A  number  of  value  estimation  techniques  need  to  be  used  since  each   method  frames  the  valuation  task  differently  and  can  highlight  different  issues  regarding  Intel's   business  practices.    Further,  each  valuation  technique  requires  differing  levels  of  structure  and   assumptions.    No  one  technique  is  perfect,  but  cumulatively  they  provide  a  good  indication  of  a   company's  value.    These  models  suggest  Intel's  value,  including  dividends,  will  grow  by  6.56%  to   14.70%  a  year  over  the  next  10  years.     Another  important  perspective  is  from  the  view  of  a  potential  holder  of  company  debt.     Credit  analysis  is  the  evaluation  of  a  firm's  ability  to  repay  debt  and  associated  interest   payments  and  specifically  a  forecast  on  whether  a  firm  will  face  financial  distress.    Credit   analysis  of  Intel  suggests  it  is  healthy  and  has  ample  ability  to  pay  liabilities  from  cash  on  hand   as  well  as  from  on-­‐going  operations.    Further,  S&P  currently  rates  the  credit  worthiness  of  Intel   debt  at  A+  suggesting  Intel  has  "a  strong  capacity  to  meet  financial  commitments,  but  [is]   somewhat  susceptible  to  adverse  economic  conditions  and  changes  in  circumstances."     In  closing,  the  analysis  suggests  Intel  is  a  leader  in  the  semiconductor  industry  and  is   making  the  right  strategic  decisions  to  ensure  they  maintain  that  position.    Further,  an   examination  of  the  financial  statements  does  not  indicate  any  improprieties.    Due  to  these   insights,  along  with  strong  forecasted  financial  performance,  Intel  is  a  BUY.     62  
Financial Analysis and Reporting of: Johnson and Johnson Stock Symbol: JNJ NYSE Strategic Analysis Company Overview Johnson and Johnson (J&J) is well known as one of the world's leading manufacturers of health care products. In 1886, J&J was founded by 3 brothers: Robert Wood Johnson, Edward Mead Johnson and James Wood Johnson. They had a dream of improving sanitation practices in the 19th century. Robert Wood Johnson was inspired by Dr. Joseph Lister in 1876 on antiseptic surgical methods. They produced the first commercial antiseptic gauze in 1886. The company was incorporated in 1887, with only 14 employees and has grown to more than 125,000 employees. The corporation's headquarters is located in New Brunswick, New Jersey, United States. They have more than 275 operating companies in over 60 countries and products are sold in over 175 countries, with major operations held in the US, Europe, the Asia Pacific region, and Africa. J&J operates through three segments: Pharmaceutical, Consumer and Medical Devices, and Diagnostics. In these 3 segments, Medical Devices and Diagnostics represents 40% of sales, which is the highest revenue generating segment of the company; the Pharmaceutical segment comes in second place, representing 36% of their total revenues. J&J Revenues for 2017 were $71.89 billion, which is higher than the previous year of $70 billion. J&J’s strategy from inception, is best stated in their own company Credo which is “putting the needs and well-being of the people we serve first.” They continue to strive for innovation when it comes to providing quality products for their customers which, as stated in their company mission statement, includes doctors, nurses and patients, as well as mothers and fathers and all who use their products and services. As a global manufacturer, J&J must not only provide excellent quality but also identify the varying needs of the countries they serve, and carry out their "Worldwide Quality Policy". J&J’s success can be attributed to their strong image and trust they have build in their customer's minds in their products; this has been the most crucial factor that has made, and continues to make, J&J the successful enterprise it is today. Industry Analysis Pharmaceuticals and Medical Devices & Diagnostic make up close to 80% of the total revenues for J&J as of FYE 2017. First, we will discuss the medical devices industry followed by the pharmaceutical industry, as Johnson and Johnson revenue make-up is concentrated on these two industries. There is no standard way of defining the medical device industry, due to the wide range of items that can be considered medical devices. In a report to Congress dated June 2017, the Congressional Research Service (CRS), BMI Research, and the Advanced Medical Technology Association (AdvaMed, the industry’s main trade association) have estimated that total US Spending in medical devices reached $172 Billion in 2013. An AdvaMed study found that the share of total U.S. spending on health care devoted to medical devices has changed very little over time, suggesting that spending on medical devices has grown at about the same rate as the broader health care sector. International trade also plays a significant role in the medical device industry. Between 35 percent and 40 percent of domestic U.S. production is ultimately exported, and a similar share of domestic U.S. consumption is imported (Gravelle and Lowry 2015). Foreign sales represent 40 percent to 50 percent of overall revenues for U.S. medical device companies when sales by foreign subsidiaries are taken into account (Seligman 2013). The largest export markets for U.S. medical device companies have traditionally been the countries of the European Union and Japan (International Trade Administration 2010). The United States is the largest single market for medical devices and accounts for about 40 percent of worldwide sales (BMI Research 2015). The global pharmaceutical industry’s (or pharma industry) revenue is forecasted to reach an estimated $1.3 trillion by 2018, with good growth over the next five years (2013-2018). The industry players are expected to register growth led by an aging population, changing lifestyles, hectic daily activities, unhealthy eating habits, and increasing incidence of chronic diseases across the entire global population. The industry is engaged in the discovery, development, manufacture, and marketing of prescription drugs. Industry products include ethical drugs and consumer healthcare, but animal healthcare drugs are not included. There is a significant overlap between the biopharmaceutical industry and the pharma industry. The global pharmaceutical market faces major challenges from increasing investment and strict regulation. Changing lifestyles and the fast socio-demographic shift due to urbanization in both developed and growth markets globally are expected to drive the demand. The ability to create modern technology and innovative drugs is a key driver for success in this industry. Pharma is a dynamic industry with rapid growth and the potential for high profits. Topselling drugs have annual sales exceeding $1 billion. However, a new drug requires millions of dollars invested in research and development (R&D) and testing before it can be brought to market. The majority of new projects never receive approval from the Food & Drug Administration (FDA), resulting in large amounts of capital burned just to get one profitable product. The pharmaceutical industry in the United States is the world's most important and the biggest pharma market. The US pharmaceutical industry alone accounts for nearly 40 percent of the global pharmaceutical industry. Many of the leading companies of the global pharmaceutical industry are located in the United States. While the US pharmaceutical market has undergone several structural changes in the last couple of decades, it still remains highly globalized and dominated by multinational companies that engage in significant business activity in many countries and whose products are distributed and marketed around the world. Competitive Environment In this section, Porter’s Five Forces Model is used to analyze the pharmaceutical industry. Porter’s five forces are: Rivalry among existing firms, threats of entry posed by new or existing firms, bargaining power of Suppliers, bargaining power of Buyers and closeness of substitute products. Rivalry among existing firms The pharmaceutical industry is one of the most competitive in the world. Most of the players have been in business a very long time and are well recognized globally. The industry is therefore characterized by intense rivalry. With more than $1 trillion in global sales, the pharmaceutical business can be cutthroat. The huge importance of intellectual property results in intense competition for high-level workers and leading researchers. Even strong nondisclosure and non-compete clauses cannot prevent the leaking of competitive information. Any potential new drug has its public information analyzed for the possibility of creating a similar drug to market as a substitute. The industry exhibits a pattern of firms merging and larger firms buying smaller firms that have promising research or new drugs. Technological advancement in biotech and generics have further increased the competition as companies have no option other than to adopt new technology. Thus, there is a constant pressure to innovate. Threats of entry by new or existing firms The threat of new entrants is low in the pharmaceutical industry. There are extensive costs associated with establishing a manufacturing set up, Research and Development, Marketing sales, and distribution. There is also a high risk of no returns on investment if a company fails to produce the required new drugs on time, causing losses in the millions. The lengthy process for approvals by the FDA and other regulatory bodies is another factor that renders the entry barriers very high. The existing players have developed economies of scale, leading to increased profits. Established brands and product differentiation are one more cause for the low threat of new entrants. A new entrant will have a tough time getting access to distribution channels. Most buyers go for drugs they are familiar with and have already tried. So, a new entrant will have a hard time grabbing market share. Another reason is that most drugs are patented, so new entrants will have to start from scratch to even enter the market. Bargaining power of suppliers The US Pharmaceutical industry only requires the raw materials needed to make the drugs, as the drugs are manufactured in-house. The second requirement is technology for manufacturing and production plants. The third element the suppliers provide is the packaging materials. All of these are supplies that a number of suppliers are willing to provide. Some of the suppliers include BASF Corporation, Nexeo Solutions, and Wako Chemicals (Pharmaceutical Resource Directory, 2017). So, suppliers generally have little room for negotiation. Large pharma companies generally enjoy significant buying power. They can dictate the price they want to buy at or take their business elsewhere. Therefore, the suppliers’ bargain power is very low in the pharma industry. Bargaining power of buyers Pharma is unique among industries because the medical patient has an absolute lack of power regarding pricing. The prescriber of the drugs, the physician, ethically is not allowed to profit from the sale of drugs. The entity that pays for the drugs, the insurance company, only has a say in how much it will pay to the distributor of the drugs, meaning it has little power with the drug manufacturers. The insurer can refuse to pay for treatments it believes are overpriced. The only entities with any negotiating power are the pharmacies and medical institutions that fulfill the medical patients’ prescriptions. Even these entities have little power over newer drugs under patent or drugs with only one manufacturer. Patents of new drugs last for twenty years, allowing the manufacturer to dictate the prices for this time period. After this time, generic production begins, and prices become more competitive. Buyers today have access to the internet which allows them to further do research on drugs in addition to the prescriptions of their doctors, giving them some bargaining power. Pharmacies focus on their profit margins and have little incentive to provide patients with the lowest possible pricing. So, overall, the bargaining power of the buyer or customer is medium. Closeness of substitute products The second threat is alternative medicine and treatments to these drugs. This is more common in the eastern nations. These include yoga, meditation, and various other therapies. Also, homeopathic and herbal treatments are substitutes for drugs made by pharmaceutical companies. Promotion of a healthy lifestyle such as balanced diet, exercise and other physical actions are substitutes to many drugs. Additionally, there is a major international problem with counterfeit drugs. The best of these counterfeits duplicates a real drug's formula and sells it at a lower price, which hurts corporate profits. The worst counterfeits are made with low-grade materials and can destroy the reputations of the legitimate products. Thus, the threat of substitute products is from low to medium. Competitive Advantage Johnson & Johnson’s competitive advantage is that they are considered the pioneers of their industry, especially since they created not only the first adhesive bandage, but the first health kit as well. One major advantage is that Johnson & Johnson lacks significant competitors for some of their business segments, and they have a long history in the industry. In the consumer segment, Johnson’s Baby is the leader in the baby care industry with little to no competition for certain products. Though in the pharmaceutical segment they have been offering innovative products for over 130 years, they have more competition often due to generic drugs offered (JNJ). Even so, they have become one of the most trusted names around. An example of this would be that most people say Band-Aid, instead of the proper term of adhesive bandage when looking for first aid. Their brand name has become synonymous with the product. This is a competitive advantage that many companies have yet to acquire. J&J has gained the “trust” of their customers, physicians, nurses, patients, families. In general, J&J is a household name that has gained the “trust” of the consumer. Company Resources and Experiences Innovation is such an important part of the Johnson & Johnson dynamic, so much so that they have become leaders in their industry. They have now taken the steps to be at the forefront of medical innovation by partnering with Houston’s Texas Medical Center to create the new Center for Device Innovation at Texas Medical Center, or CDI @ TMC. Their goal is to “develop breakthrough medical devices designed to make surgery less invasive, as well as innovate ways to bring cutting-edge procedures to underserved populations around the globe,” according to the new announcement from Johnson & Johnson. Instead of being just the producer of medical supplies and equipment, they are taking the initiative to spur new technology and discovery for medical science. Lastly, in our most recent decade, the importance of hiring the right people for the company has become evidently one of the key ingredients to success. Talent acquisition, another strength that Johnson & Johnson has, is how it acquires its talent. Sjoerd Gehring, Global Vice President of Talent Acquisition for Johnson & Johnson, believes that the “traditional methods are outdated”. There are approximately 1 million applicants for the 25,000 openings at the company each year at Johnson & Johnson (JNJ). The steps that they are taking to aid in this process is modifying job descriptions, addressing bias, and creating a tool for feedback. The company will be partnering with the start-up Ruutly to create interactive ads on the Johnson & Johnson career site that describes more of the benefits of working at their company over another. SWOT Analysis Strengths in J&J 1. Brand recognition and trust: Johnson & Johnson is a brand trusted by many medical practitioners & parents around the world. Johnson & Johnson’s increased focus on tailoring business to local markets has helped them in being relevant to consumer demand. 2. Broad brand portfolio: Johnson & Johnson have a strong presence within each product category. They have deep assortments & large numbers of brands to choose from which helps them to occupy large shelf space of the stores resulting in high visibility in the market. 3. Diversified sources of revenues: While J&J competes in the pharma sector, the company has a uniqueness of enjoying revenue generating segments that are outside of the traditional pharmaceuticals, such as consumer products. This includes baby care, oral care, beauty products, and medical devices. Their diversified revenue sources allow for strategic advantages when a certain sector is declining, being able to make-up operating revenues in the other 2 segments. 4. Strategic mergers & acquisitions: Through mergers & acquisitions with various consumer health care & pharmaceuticals companies like Neutrogena, Alza, Scios, Pfizer Consumer Healthcare, and many more, Johnson & Johnson has created a pool of technological & operational advancement which is helping the company in its further growth. 5. Supply chain: It has an extensive & robust distribution system meant for making the products available to retail outlets, super markets & medical stores even in the remotest rural areas. 6. Brand equity: It is the 79th highest ranked brand in the world in 2016. Weaknesses in J&J 1. Litigation: The company got involved in litigations over a period of time: as in 2010, when J & J’s board had been sued by shareholders and Boston scientific for use of the red cross symbol. Events like this cost the company money and can affect their brand image and will spread negative word of mouth. 2. Conflict with partner companies: Handling such a large product portfolio and so many partner companies can create disorganization in the operations of the company, so J & J should think carefully before entering into mergers & acquisitions. 3. Dependence upon the Success of Launch Products: Many new launch products are vulnerable to the uncertainty of regulatory review. 4. Reliance on Small Molecule Drugs: Small molecules are more impacted by generic competition. Johnson & Johnson’s small molecule drug sales declined in 2008 and 2012. The necessity of finding replacements for billion-dollar products as they mature represents a daunting task. Opportunities for J&J 1. Wide Range of Potential Cross-selling Opportunities: Johnson & Johnson is in a position to strategically develop a myriad of cross selling opportunities. Maximizing its balance between pharmaceuticals, diagnostics, and medical devices could result in increased revenues. 2. Potential to Exploit Biologics Market: The addition of further biologics (e.g. therapeutic proteins, antibodies) to its portfolio can serve as a buffer as small molecule patents expire which will drive the future growth of the company. 3. Changing lifestyle: With the increasing literacy rate worldwide there is an increase in concern over health & medical issues to which there is a corresponding increase in demand of medical products, so J & J will also benefit from this. Threats for J&J 1. Fight against harmful ingredients: Many times, Johnson and Johnson products have been found to have ingredients which could be carcinogens. Similarly, these ingredients have been banned in the US and other countries. Repeatedly, this fight against harmful ingredients has affected the brand image of Johnson and Johnson. 2. Negative Impact of Product Recalls: Johnson and Johnson has had the misfortune of having to recall more than 40 medicines. The company stands to take a hit to its reputation, competence and integrity. 3. Intense Rivalry: Due to the presence of strong global competitors who provide alternative & substitute products, J & J is facing stiff competition. Also, local players who are offering generic products are also affecting the business. 4. Government regulatory norms: Government regulatory norms over the contents & export and import tariffs play a critical role in the success of companies in these industries to which J & J is not an exception. Values of Key Personnel Alex Gorsky, Chairman of the Board and CEO of Johnson and Johnson, is the seventh CEO since the company went public in 1944. As per an article published February 2018, “Gorsky demonstrates a big heart for people, which seems to fit perfectly into the disposition of a company like J&J. On the other hand, his studies at the US Military Academy of West Point and his six years' service in the US Army add firmness and down-to-earth spirit to his character.” According to Yahoo Finance, J&J is ranked as #25 among America’s Best Companies to Work for; Johnson & Johnson employees laud the company’s benefits package, which for many includes a pension plan. Alex Gorsky, who has publicly stressed the importance of employee work-life balance, has a 95% approval rating from current and former Johnson & Johnson employees on Glassdoor. Societal Expectations Johnson and Johnson’s Credo best explains the societal expectations of this Company: “Put simply, Our Credo challenges us to put the needs and well-being of the people we serve first.” The theme throughout Johnson and Johnson’s webpage revolves around stories of the people their products have helped in their health and their life. From the inception of the company with the 3 Johnson brothers striving to use innovation and discovery to improve the surgical techniques of the times, they have placed “Corporate social responsibility” at the core of their business, even before the term “corporate social responsibility” existed as widely known as it is today. In doing our research of this company, we found that the societal expectation of J&J is centered around: (1) doing the right thing, (2) helping people in their times of needs through their quality products, and (3) continue to innovate in finding solutions to improve the quality of their products, medical devices and pharmaceuticals. Therefore, Johnson and Johnson is doing the right thing in what is expected of them as a business, and they are doing it the right way. References 1. Johnson and Johnson website: 2. 3. The Industry Handbook: Pharma Industry | Investopedia 4. Porter, M. (1996). “What is strategy?” Harvard Business Review 74: 61-78 5. Palepu, P & Healy, P (2007). Title: Business Analysis and Valuation: Using Financial Statements. Edition 5 6. 7. Report to Congress on Medicare and Healthcare Delivery systems June 2017: webpage:

Tutor Answer

School: Boston College



Assessment of Solvency
A Case of Johnson & Johnson
Institutional Affiliation



Assessment of Solvency

Solvency refers to the capacity of an organization to meet its long-term financial abilities.
This concept is crucial in business because it depicts an entity’s capacity to continue operations
into the conceivable future. Typically, while an organization also requires liquidity to prosper,
one should not confuse liquidity with solvency. In fact, organizations that are insolvent tend to
file for bankruptcy. For a company to be regarded solvent, the value of its assets must exceed the
sum of its debt liabilities. In other words, the assessment of solvency is similar to credit analysis.
Credit analysis is a form of analysis that investors use to assess a company’s capability to meet
its financial obligations. The primary objective of credit analysis is to determine the suitable
level of default risk linked to investing in a specific enterprise. This segment will assess the
solvency of Johnson & Johnson (Gibson, 2012).
Calculation of Altman Z-Score Model
The Altman Z-Score model refers to a financial framework that forecasts the probability
of bankruptcy in an entity. This model was established by Edward I. Altman. The aim of the
Altman Z- Score framework is to assess an organization’s financial health and to forecast the
possibility that it will fail within two years. Scholars and financial experts argue that this model
is accurate to predict bankruptcy in several markets and financial contexts. Generally, the higher
the Z-Score, the lower risk of bankruptcy an organization has, and vice versa. Furthermore, the
Altman Z-Score is founded on five financial ratios: leverage, profitability, liquidity, activity, and
solvency (Gibson, 2012).
The formula for the Altman Z-Score is as follows;




A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest & Tax/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets (

Below is Altman Z-Score data for Johnson & Johnson for the past ten years. Based on the
data, the value of Altman Z-Score for the past ten years has been fluctuating. Between 2007 and
2009, the value was increasing but then decreased from 2010 to 2011. From 2014, the Altman
Z-Score value for the company started to decrease (Wahlen, Baginski, Bradshaw, 2014). If
Johnson& Johnson fails to put effective measures in place, it’s likely to fail to meet its financial
obligation based on the declined value of Altman Z-Score. The data is shown in a table and a

Altman Z- Score






2012 2013
4.81 4.80







Altman Z-Score (Johnson&Johnson)

Altman Z-Score

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Estimate of Debt Rating
Debt ratings affect the yield th...

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