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Intel: Capital Raise For Buyback Could Add 2% To EPS

 December 07, 2012 09:48 AM

(By Mani) Chip giant Intel Corp. (NASDAQ: INTC) released the full details of its newly issued debt offering that could aid buybacks, thereby boosting earnings per share by at least 2 percent.

Intel seems to have decided to take more leverage on its balance sheet as the actions are prudent given low debt borrowing costs in today's environment for A+ rated paper.

In total, Intel is raising $6 billion of new capital in four tranches, which is far above the market's initial expectation of the offering in a $2 billion to $3 billion.

"In our view the raise will likely support increased buy-backs, we see less of a chance that material M&A results from increased balance sheet," RBC Capital Markets analyst Doug Freedman wrote in a note to clients.

[Related -Intel Corporation (INTC) and 5 Other Stocks That Could Pop on Earnings This Week]

This action shows the company's confidence in cash generation ability, and signals that Intel believes it has the controls to take on this level of debt with minimal risk despite the present state of the PC market and macro conditions.

"If we assume that 75% of the $6bil raise, or $4.5bil, will go towards share repurchase (~200mil shares), thus creating $0.03 (~2%) of incremental EPS in 2013," Freedman said.

Intel intends to use the net proceeds from the offering, which is expected to close on Dec. 11, 2012, for general corporate purposes and to repurchase shares of its common stock under the company's existing share repurchase authorization.

[Related -Intel Corporation (INTC) Q4 Earnings Preview: Room To Pop On EPS]

The more that is allocated towards buy-backs would increase upside to EPS. The portion of debt which could go to fund capacity would likely fund 450 million assets that could yield roughly 20-years of life.

Meanwhile, this debt offering was in the works prior to the change in heart displayed by CEO Otellini's retirement announcement. Investors are likely to question if the typical investment through the cycle-strategy was in question and a key part of the need for a change.

"We are asking ourselves if CEO Otellini was pushing for a new view of the PC opportunity and the board was pushing back, wanting to continue to invest beyond the horizon of the present management team," Freedman noted.

Based on consensus, Intel currently trades at a 10.1 times P/E multiple for 2013 and a 9.2 times P/E multiple for 2014. This compares to PHLX Semiconductor Index at 13.0 times for 2013 and 11.0 times for 2014 and Semiconductor peer group at 13.1 times and 12.1 times, respectively. On a 5-year basis, Intel has historically traded between 8.6 times and 50.8 times with an average of 18.1 times.



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