The (Risky) Case for Betting on Intel

by Daniel Putnam | October 12, 2012 7:00 am

The (Risky) Case for Betting on Intel

Intel (NASDAQ:INTC[1]) has suddenly become the stock that won’t stop going down. After confounding the skeptics with a 35% gain from October 2011 through April of this year, the chipmaker’s shares have since been hammered for a loss of 22% — and counting.

Does this make Intel a buy, or is it destined to go the way of Hewlett-Packard (NYSE:HPQ[2]), a company that can’t get out of its own way and torpedoes value portfolios for years to come?

At first glance, Intel has all the attributes of a value play — it has lots of cash to fund future growth, it offers a hefty 4.1% dividend yield (better than what you can get in most corporate bond funds), and it sports a forward P/E of 10. Unfortunately, none of this matters as long as investors’ biggest fear — the eventual obsolescence of the PC — continues to plague the stock.

The “death of the PC” crowd was emboldened this week following a series for reports from the industry consulting firms IHS, IDC and Gartner. The IHS report garnered the most headlines, as the firm predicted a 1.2% decline in personal computer sales in 2012, the worst showing in 11 years.

IDC and Gartner estimated that third-quarter PC shipments will fall 8.6% and 8.3%, respectively. At the same time, analysts have been tripping over themselves to slash their earnings estimates for Intel. According to Yahoo! Finance, 2013 estimates have fallen from $2.64 to $2.16 in the past 90 days. And regarding the December quarter, the results are unanimous[3]: eight estimate cuts versus zero upward revisions in the past month.

Citigroup added to the carnage this week with a report on how the BYOD (bring your own device) trend is beginning to cut into PCs’ dominant position in the workplace.

Here’s the problem in a nutshell, as outlined in a research note from Sanford Bernstein earlier this week: “We have long promulgated the point of view that Intel’s risk profile is, simply, inherently asymmetric. Even with structural advantages in capex/process and a reasonably compelling roadmap, it is simply a fact that they have much more to potentially lose than they have to gain.”

So What’s Next?

With this sort of news flow, value investors have been scared to step up to the plate thus far. But for those who can afford to be patient, Intel still offers an opportunity due to its favorable risk/reward profile.

On one hand, much of the concern has already been discounted into the share price in recent months. The accompanying chart shows that Intel is near a decade-low valuation even as its return on assets and earnings yield sit near their highs. This presents the opportunity for results that are “less bad” than anticipated to drive the stock higher.

intc 300x108 The (Risky) Case for Betting on Intel
Click to Enlarge

Among the potential factors that could set the stock on a better course in the year ahead are:

The most compelling opportunity in Intel — now under $22 after trading as high as $29 less than six months ago — may be from a trading standpoint. The company reports earnings on Tuesday, Oct. 16 and is coming in with rock-bottom expectations and a lowered bar. With all of the bad news surrounding the stock, it’s easy to lose sight of Intel’s tendency to beat estimates. According to CNBC.com, Intel has exceeded estimates 12 quarters in a row[7], with the last miss back in the second quarter of 2009.

This sets up an excellent trade in the coming days: If Intel exceeds estimates, the stock could have some decent upside. But even if it misses by a few pennies, the shares could still see a lift on a relief/“buy the news” rally.

The Bottom Line

Intel isn’t a “safe” bet here, and it’s unlikely to reclaim its glory days as a fast-moving growth stock. Still, its shares look attractive across multiple time frames if you can withstand the risk. Consider a buy in this beaten-down name, but watch its support level at $21.

intc21 1024x408 The (Risky) Case for Betting on Intel[8]

As of this writing, Daniel Putnam held a position in Intel.

Endnotes:
  1. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  2. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  3. unanimous: http://finance.yahoo.com/q/ae?s=INTC+Analyst+Estimates
  4. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  5. investing heavily: http://www.reuters.com/article/2012/09/11/us-intel-haswell-idUSBRE88A14G20120911
  6. AMRH: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMRH
  7. 12 quarters in a row: http://data.cnbc.com/quotes/INTC/tab/5
  8. [Image]: http://investorplace.com/wp-content/uploads/2012/10/intc21.jpg

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