Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Using the Value Line Page: IBM or Intel? October 08, 2010
The Business Description for Intel (INTC – Free Analyst Report) describes the company as a leading manufacturer of integrated circuits, serving the makers of personal computers. To a lesser degree, it also serves the communications, industrial automation, military, and non-computer electronic equipment sectors. Its main products are microprocessors (notably, the Pentium series), microcontrollers, and memory chips. Intel also sells computer modules and boards, and network products.
International Business Machines’ (IBM – Free Analyst Report) Business Description, meanwhile, explains that IBM is a worldwide supplier of advanced information processing technology, communication systems, services, and program products. In 2009, its revenues were broken between Global Technology Services, 39%; Global Business Services, 19%; Systems and Technology, 17%; Software, 22%; and Global Financing, 2%; Other made up 1% of revenues.
As the two Business Descriptions make clear, both companies are major players in the technology space. Though they work at different ends of the industry, both names should be on the lists of any investor seeking a large-cap technology investment. Note that readers can download free copies of each report here for use with this article.
Which company, however, is the better option? That question isn’t easily answered, since each investor, and his or her preferences, is unique. That said, the Value Line page can help an investor quickly identify which company’s stock would better serve his or her specific needs.
The similarity between IBM and Intel is quite interesting. They both earn Value Line’s second highest Rank for Timeliness, Highest Rank for Safety, and an average score on the Technical Rank. (Each of these rankings are proprietary Value Line measures and can found in the Ranks box at the top left of the page.) Putting those ranks into perspective, they suggest that both companies are financially stable (Safety), are expected to perform about in line with the markets over the next three months (Technical), but to outperform the average stock in Value Line’s coverage over the next six to 12 months (Timeliness). Backing the Safety rank up in both situations is the highest possible rating for Financial Strength (A++)—this can be seen in the Rating box at the bottom right of the page.
After this point, divergences begin to appear. For example, though both companies score well on Value Line’s propriety Price Stability rating, IBM’s score is clearly higher than Intel’s. In fact, this trend covers Growth Persistence and Earnings predictability, too, with IBM besting Intel on both. (These measures also appear in the Ratings box.) It is important to note that IBM’s Earnings Predictability is the highest possible 100, while Intel’s sits at 50. A quick look at the most recent recession, which is clearly marked on the Graph with a shaded area starting in late 2007 and extending through to the middle of 2009, illustrates why IBM scores more highly here. This difference can also be quantified by looking at the Beta coefficient, a measure of volatility relative to the market (this statistic can be found in the Ranks box, with larger numbers indicating more sensitivity to the movement of the broader index). Intel’s Beta is 1.05, while IBM’s is 0.85; clearly IBM shares are less volatile than Intel shares.
Indeed, looking below the Graph at the historical portion of the Statistical Array for each company shows that IBM’s earnings didn’t skip a beat during the recession, while Intel’s fell for two years. (Note that the Graph and the Statistical Array are aligned, so that the time periods of each match.) Looking over a longer time period for each company also highlights a somewhat cyclical nature to Intel’s earnings—not surprising for a chip company. IBM’s earnings history, meanwhile, shows far more consistency. This is the first material difference about which investors should be aware: Investors seeking consistent earnings would be better served by an investment in IBM.
Value Line’s projections for each company are also a material point of differentiation. As can be seen in the Projections box on the top left of the page, IBM is expected to have an annualized total return (including dividends) of between 11% and 17% over the next three to five years. Although this is a formidable expectation, Intel is projected to have an annualized total return of between 24% and 30%. Clearly, those in search of share price appreciation without regard to any other metric would likely favor Intel.
Of course, as Intel’s history has illustrated, the earnings behind the price projection can be volatile. So that the gains could come in fits and starts. IBM’s earnings, however, tend to move slowly, but surely, higher, suggesting a share price that will slope gently, but consistently, upward toward Value Line’s target range. So, more conservative investors might prefer IBM despite the lower expected total return—a tradeoff for consistent performance.
Valuation is another point of distinction between the two companies. Comparing the Top Label section of each page shows that IBM’s Price to Earnings ratio is higher than Intel’s on an absolute basis and when compared to the broader market, as illustrated by their Relative P/E Ratios. Thus, IBM is more expansive at present, though it is toward the low end of its historical range. Intel, meanwhile, is cheaper than IBM at the moment and is at cheaper than it has been since 1994. This partially explains why Intel has more upside share price potential then IBM. Note, however, that neither company is particularly overpriced at the moment. Thus, a value investor might be interested in both companies, though Intel might be viewed as the better selection.
Intel’s 3.2% dividend, which is higher than IBM’s, at the high end of Intel’s historical range, and above the median of dividend paying stocks under Value Line coverage, would also support this thesis. (A company’s current dividend yield can be found in the Top Label, while its historic results for this statistic can be found in the Statistical Array.) Still, IBM’s dividend of 2.0% is in line with the median stock and at the high end of its historical range. Once again Intel appears the better option both on an absolute income basis and when using dividend as a valuation tool, though IBM isn’t far behind. Both companies have a history of regular dividend increases, but IBM’s is longer. Too, as the Annual Rates box shows, IBM is expected to increase its distribution at a higher rate than Intel. (Note that large distribution increases between 2003 and 2006 skew Intel’s three- and five-year historical rates higher on this measure, a trend that Value Line does not expect to continue.)
While examining the Annual Rates box, it is important to note that revenue growth at IBM is expected to be higher than that of Intel over the next three to five years. However, earnings growth at Intel is anticipated to outstrip IBM—this is partially a function of the earnings drop Intel experienced during the recession. The discrepancy, though, is another supporting factor behind Intel’s higher expected total return.
In the end, both IBM and Intel appear to be good companies trading at relatively low valuations with fairly good long-term prospects. The question, perhaps, isn’t so much “is IBM or Intel better?” but “which type of investor is better for IBM or Intel?” Those seeking a more conservative tech company with a consistent history of earnings gains and dividend increases would likely be happier with a position in IBM, even if that means a lower expected total return over time. Those favoring total return over sleeping well at night, meanwhile, would probably feel comfortable with an investment in Intel.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.