Owning a Toll Booth

GroovyStocks on Intel (INTC):

According to Yahoo Finance, shares of Intel are now trading at 14.7 times trailing earnings and 14.1 times forward earnings with an EV/EBITDA ratio of 6.7. We think these are very reasonable multiples to pay for such a high quality company.
Sticking with Yahoo’s numbers, INTC has an operating margin of 31.1% and a profit margin of 22.3%. Return on assets is 15.7% and return on equity is 23.2%. The balance sheet has $12.8 billion in cash and $2.4 billion in debt, or over $10 billion in net cash. If you know another place where we can buy such high profitability and returns with balance sheet strength even half as good, please let us know!
Intel’s size gives it a huge competitive advantage. Here’s a quote from Columbia Business School professor Bruce Greenwald that sums the matter up:
“When Intel goes after the next generation chip, because it’s got some degree of customer captivity — which is crucial to scale advantages — Intel can expect, if it’s successful, to get 10 times as many customers as AMD. That means Intel can spend 10 times as much on developing and marketing the new chip. That’s the advantage of scale. So who’s going to win that race every time? Intel.” (Related Post)
We view owning Intel as owning a toll booth: (almost) every time somebody buys a computer you collect a fee. Sounds like a good business to us!

Posted by on February 27th, 2006 at 11:15 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.