April 15 is a day that few Americans could forget if they wanted to: It’s the day tax returns are due. But this year, it also happens to be the day that Intel (INTC) releases its first-quarter earnings results.
INTC has had a decent run in 2014. After bottoming on Feb. 5, INTC stock has rallied by about 12%, vs. a gain of about 4% for the S&P 500. INTC, like the rest of the familiar “old tech” names, has avoided the valuation-based selloff that has wrecked the likes of Facebook (FB), Twitter (TWTR) and Tesla Motors (TSLA) among others. At current prices, Intel trades for 14 times trailing earnings and sports a dividend yield of 3.4%.
Estimates for the quarter are pretty modest. The analyst consensus is 37 cents for the quarter and $1.86 for full-year 2014. If earnings came in according to consensus, it would be a slight decline from the 40 cents earned in the first quarter of last year and $1.89 for full-year 2013.
The lack of excitement surrounding INTC earnings is easy enough to understand. While I like Intel as a staid and reliable dividend payer and have owned and recommended it for years, the secular decline in PC sales has hit the company hard. According to Gartner, worldwide PC shipments declined 6.9% last year.
Intel’s server business has benefitted from the rise of the cloud, and INTC may finally be close to making real inroads in mobile. But for the purposes of first-quarter earnings, the results are going to come down to two primary questions:
- Corporate PC sales: Has a modest uptick in corporate spending resulted in stronger-than-expected corporate PC sales?
- Intel’s foundry business: Will Intel’s foundry business, in which it builds chips designed by other firms, generate significant revenues faster than expected?
INTC — Buy, Sell or Hold?
So, is INTC stock a buy ahead of earnings? I expect results to come in more or less in line with the consensus numbers. Intel has a history of rallying into its earnings release, including 15 of the past 17 quarters.
This is my view: The PC market has been weak for year due to secular factors — the rise of mobile computing at the expense of traditional PCs — and cyclical factors. A weak economy with high unemployment has meant that companies upgrade less frequently and consumers stretch their existing equipment a little further.
There is no “cure” for the secular decline in PC usage among consumers, but I expect to see corporate IT spending improve pretty dramatically this year. Already, Gartner has reported that the declines slowed in the first quarter of this year to just 1.7%. And the end of Microsoft (MSFT) support for Windows XP and the belated improvements to Windows 8/8.1 should bode well for PC sales — and INTC stock — the remainder of this year.
INTC hasn’t raised its dividend since 2012, as the company opted to spend its cash expanding its foundry business and pushing more aggressively into mobile. I expect Intel to reward its shareholders for their patience by upping the dividend sometime this year.
So, returning to the question, is INTC a buy? Yes, if you are patient dividend investor. But don’t expect anything too exciting from tomorrow’s earnings announcement.
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As of this writing, Charles Sizemore was long INTC and MSFT.