Intel Corporation (INTC) doesn’t get a lot of love these days.
Investors didn’t see much that they liked in INTC’s fourth-quarter earnings report last week. Even while INTC beat estimates on both earnings and revenues, the takeaway from the call was that the chip market — even for the servers powering the cloud — is looking saturated.
Abundant supply and tepid demand is a recipe for lower margins … hence the lack of enthusiasm for Intel stock.
Well, the picture might be getting a little brighter.
A Ray of Light for INTC Stock?
Intel stock actually got upgraded earlier this week by Macquarie Research. Macquarie believes that Intel undershipped in 2015 as buyers worked through existing inventory. This means that, even in a fairly tepid market for chips, Intel should see decent demand due to restocking if nothing else.
Maybe — we’ll see about that. But I would agree that Intel is cheap and unloved enough that even a small improvement would be enough to send the Intel stock price sharply highly.
Let’s take a look.
As of today’s prices, Intel stock trades for just 12 times earnings and sports a dividend yield of 3.4%. That definitely makes Intel look like one of the cheapest large-cap stocks in America.
Looking at the cyclically adjusted price/earnings ratio (CAPE) — also called the Shiller price-to-earnings ratio — we see a slightly different story.
The CAPE was a favorite tool of Benjamin Graham, Warren Buffett’s old mentor and the father of value investing as we know it today. Graham recommended taking an average of five to 10 years of earnings data rather than using a single year as a way of filtering out the short-term noise.
On this count, Intel stock definitely looks less cheap, trading at a CAPE of a little over 20. But keep in mind, the CAPE of the S&P 500 is currently 24.6, so Intel trades at a decent-sized discount to the broader market.
Let’s now take a harder look at INTC’s dividend. A 3.4% yield isn’t half bad in this market, and there is still plenty of room to grow, as INTC currently only distributes about 40% of its earnings as dividends.
And grow it has. Despite taking a 10-quarter hiatus in 2012-2014 in which it kept the dividend unchanged, INTC has still managed to generate dividend growth of 16% per year over the past decade and a still-pretty-solid 11% over the past five years.
For a look at INTC’s future, consider the results of its old “Wintel” partner Microsoft Corporation (MSFT). As I wrote in an earnings recap yesterday, Microsoft is successfully reinventing itself in the post-PC era as a cloud services company.
With PC sales in the toilet — and with MSFT giving Windows 10 away for free in an attempt to generate interest in the product — Microsoft’s traditional PC-centric business is slowly withering. Yet its Azure platform is going head to head against Amazon.com, Inc.‘s (AMZN) AWS and doing a fine job.
Intel too is looking past the PC. For several quarters now, earnings discussions have focused on INTC’s lucrative server chips, which power the cloud. While that market may be somewhat oversupplied right now, it’s still very much a growth market and that’s not likely to change.
Bottom Line for INTC Stock
So, is Intel stock a buy?
Frankly, there’s not a whole lot I like out there in today’s market. Stocks are expensive and the momentum names that have driven the markets higher over the past few years are looking tired.
I expect value investing to come back into style in 2016, and when it does, I expect INTC to benefit.
Consider INTC a decent stock in a rough overall market.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long INTC and MSFT.
