Intel Too Cheap For Us To Ignore

12/13/2010


  Recent Price
$22
  Dividend
$0.72
  Yield
3.3%
  P/E Ratio
12
  Shares (millions)
5,694
  Long-Term Debt as % of Capital
4%
  52-Week Price Range
$24.37 - $17.60

Demand for personal computers (PCs) is likely to be sluggish in the December quarter, the casualty of a skittish consumer and competition from Apple's ($318; AAPL) iPad tablet computer. Last month, research firm Gartner ($33; IT) projected PC shipments would rise 14% this year and 16% next year, down from a September forecast of 18% growth in both periods.

Intel ($22; INTC), which provides microprocessors for 81% of PCs, is highly dependent on computer sales. Consensus estimates project per-share-profit growth of 35% in the December quarter but a decline of 2% in 2011 despite 4% higher revenue.

The semiconductor giant's share price already reflects plenty of pessimism. The stock has returned 9% over the past 12 months, lagging the average of 18% for semiconductor stocks in the S&P 1500 Index. At 12 times trailing earnings, Intel trades 35% below its five-year average and 19% below the average P/E for semiconductor stocks in the S&P 1500 Index. Intel, yielding 3.3%, is a Buy and a Long-Term Buy.

Business breakdown

Intel, like the rest of the industry, has enjoyed strong operating momentum in the wake of dismal performance in 2009. Over the last three quarters, Intel posted 31% higher sales and sharply higher profit margins. Free cash flow more than doubled.

Intel's biggest division, the PC group (73% of sales in the first nine months of 2010), builds microprocessors, chipsets, and motherboards for personal computers, such as desktops, notebooks, and netbooks. So far in 2010, sales have risen 28% and income has more than doubled.

The data-center unit (19%) builds similar components, but for use in servers, workstations, and storage equipment. The unit also makes connectivity products for computer networks. Sales have jumped 39% so far this year, with profits up 124%.

Intel strives to move beyond computers, as evident by its third segment, which supplies semiconductors for mobile handheld devices (4%). Although the segment still operates at a loss, it has lost far less money this year than it did in 2009. The unit should get a boost from Hewlett-Packard's ($42; HPQ) selection of Intel chips for its tablet computer. Intel says its chips have been chosen for 35 tablet computer models.

Sandy Bridge, Intel's next-generation processor for both PCs and servers, should launch in the March quarter. The platform could spark a major product cycle for Intel, emphasizing sharper graphics and paving the way for smaller PC devices.

Conclusion

Consensus profit estimates for 2011 have risen in the past month, and despite the decline forecast for 2011, the market expects double-digit annual growth in per-share profits over the next five years. Shares trade at 11 times the 2011 estimate, 19% below the peer-group average.

Intel initiated its divided in 1992. That dividend, raised 14% last month, has grown at an annualized rate of 17% over the last three years. An annual report for Intel Corp. is available at 2200 Mission College Blvd., P.O. Box 58119, Santa Clara, CA; (408) 765-8080; www.intel.com.

INTEL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '10
0.52
vs.
0.33
+ 18%
22.28
-
17.60
13 - 11
Jun '10
0.51
vs.
0.28
+ 34%
24.37
-
19.40
17 - 13
Mar '10
0.43
vs.
0.11
+ 44%
22.75
-
18.95
20 - 17
Dec '09
0.40
vs.
0.04
+ 28%
21.27
-
18.31
28 - 24
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2009
35.13
1.12
0.56
21.27
-
12.05
19 - 11
2008
37.59
0.92
0.55
26.34
-
12.06
29 - 13
2007
38.33
1.18
0.45
27.99
-
18.75
24 - 16
2006
35.38
0.86
0.41
26.63
-
16.75
31 - 19
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
87
91
88
95
80
46

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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