Intel Is Looking Good
By Monica Rivituso Published: March 9, 2005
yahoo.smartmoney.com
<<IN 2004, INTEL (INTC) WASN'T inside. Investors kicked it to the curb.
It was a double kick, actually. First, the stock sold off on concerns that Intel was losing its technological edge to Advanced Micro Devices (AMD). Then, the entire chip sector suffered as a supply/demand imbalance stoked fears of a glut. The Philadelphia Semiconductor Industry Index sunk 15% last year. Intel suffered a 27% drubbing.
But that was last year. The nice thing about semiconductor investing is that there's always an upturn to look forward to. Back in January, we alerted readers to the impending industry rebound. Because chip stocks move ahead of the fundamentals, and can take off with lightening speed, it's important to stake out positions early. And right now, things are looking up for Intel. In a big way.
On Thursday, Intel's brass will deliver its midquarter update. This is high theater in tech land, where analysts, investors and even CEOs hang on Intel Chief Financial Officer Andy Bryant's every word. Will he trim the company's traditionally wide revenue range, or tweak profit expectations? Will he proffer some nugget of insight into the health of the PC market? (He rarely does, but as with Alan Greenspan, analysts have grown adept at reading between the lines.) Is the forecast for gross margins likely to remain intact?
The scuttlebutt ahead of the update has been almost universally optimistic. A number of analysts expect Intel to nudge its midpoint for revenue guidance a bit higher from its current $9.1 billion. That could mean a slight boost for profit and gross margin expectations. Decent notebook sales volume heading into the Chinese New Year and a solid transition to its next-generation mobile technology Sonoma (which follows Centrino) are a couple of reasons to be optimistic, according to most analysts.
But there are even more reasons to be positive on Intel, according to Eric Ross, an analyst at ThinkEquity Partners. Not only is Intel seeing strong growth from mobile computing, where it's the premier player, but it has also stepped up its technological game to compete better with AMD. And Intel has fully embraced a new way of peddling its chips. It now bundles them into "platforms" that target a variety of market segments such as digital entertainment or digital enterprise. Instead of selling processor chips separately, Intel is selling silicon "solutions" around its meat-and-potatoes chips.
Take Centrino. It's not just a notebook chip. It's a technology that encompasses a Pentium M processor, a chipset for mobile computing and integrated wireless LAN. Beyond the tech specs, what you have here is a marketing strategy that allows Intel to exploit its considerable brand heft, according to Ross. At its latest Intel Developer Forum, the company hammered home the new approach. AMD hasn't made much of a move to mimic the strategy — all the better for Intel. (Ross doesn't own shares of Intel; ThinkEquity doesn't have an investment-banking relationship with the company.)
Then there's the rebound in corporate IT spending. After carrying the economic baton for years, consumers are expected to pass it off to businesses this year. In fact, some observers see the handoff happening right now. For Intel, a boost in corporate spending will only strengthen its position.
As for those beleaguered Intel shares, they've actually tacked on 6% since the beginning of the year, beating the Nasdaq's nearly 5% decline and the SOX's fractional blip higher. But even with that nice little pop, Intel still seems awfully cheap compared with the broader market.
Right now, you'd pay more for the Standard & Poor's 500 than you would for Intel. The S&P trades at about 17 times 2005 earnings, according to Zacks Investment Research. But its long-term earnings growth projection is only about 6%, according to Zacks, making for a price/earnings-growth multiple of 2.91. Intel trades at 20 times 2005 estimates, according to Zacks. But Zacks puts its long-term growth rate at 16% — meaning its PEG is just 1.28. Not only is that less than half the S&P's PEG, it's also far lower than the Zacks chip industry average of 2.17. And unlike most chip rivals, Intel offers a decent dividend yield of 1.29%.
Something is out of whack.
But it won't be for long. I think the disparity will right itself once investors realize two things. First, just because Intel no longer sports the eye-popping growth of yore doesn't mean there isn't good reason to hold the stock. Long-term earnings-growth of 16% isn't too shabby — it's still 2.5 times that of the S&P. Heck, Intel is a hare compared with the tortoise that has become Microsoft (MSFT), whose long-term earnings growth rate has slowed to 11%. Second, at some point, this entire chip sector will rebound. When that happens, all boats will rise — steamers and tugs alike.
Intel is a screaming bargain at this level. As long as Andy Bryant doesn't announce on Thursday that the company is abandoning chips and using its $8 billion-plus cash hoard to become a doughnuteer, Intel shares should fare well. Value stocks are nice — tech-stock values are even better in my book.>> |
