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Buying Intel? Hold Your Horses

Analysts still are finding reasons not to like Intel (NASDAQ:INTC), but the chip giant continues to execute as its approaches its 40th year as a publicly traded company. However, even if you love the company, it might pay to wait before you buy the stock.

Last week, Intel exceeded earnings expectations and boosted its outlook for both revenues and profit margins. These positive results followed just two weeks after the tech research firm IDC reported that personal computer sales shrank in 2011 — the first time this has happened in a decade — and that the year was the second-worst in industry history. Intel shares continue to suffer fallout from this trend, as evidenced by this statement in an article on CNN Money about last year’s weak PC sales: “All of this serves as an ominous sign for PC-reliant companies like Microsoft (NASDAQ:MSFT) and Intel, which are scheduled to report their financial results in a week.”

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This shows that for all the changes that are taking place at Intel, some investors continue to miss the real story. The company still might best be known for its role in the domestic PC industry, but that’s no longer the main driver of growth. In fact, Intel continues to generate growth from a number of diverse sources that have helped insulate it from the slowdown in U.S. PC sales. Most notable among these is the company’s robust sales growth in the emerging markets. A much lower percentage of consumers own PCs in the emerging world compared to the developed markets, but the numbers are rising rapidly as emerging-market consumers move into the middle class. This important trend helped fuel 16% year-over-year growth for the company’s PC-related business despite the weakness in the United States.

Intel’s high-margin data center business also represents a source of strength, as sales in this area rose 17% behind the ongoing build-out of the cloud infrastructure. Ultrabooks, while not yet a major fuel for growth, also are an area where the company sees significant opportunities ahead.

Together, these factors have Intel maintaining a positive growth outlook even as it struggles to make inroads into smartphones and tablets. In this sense, investors’ fixation on what Intel isn’t doing has caused them to miss the many things the company is doing well.

Despite these positive underlying business trends, there are a few items that investors need to keep an eye on. Although Intel raised its profit margin projection for 2012 in its post-earnings call, it’s worth noting JPMorgan (NYSE:JPM) downgraded the stock last week on the belief that margins are peaking. Investors will want to watch carefully to see if this prediction ultimately will prove correct, since history has shown that the stock is unlikely to make headway when its margins are falling. In addition, Intel’s substantial increase in its revenue outlook (from 3% to about 9% in the high end) needlessly set a very high bar that increases the odds of a later disappointment.

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Still, Intel continues to feature a rock-solid balance sheet, a yield north of 3% (with rising dividends), and a P/E ratio (11.4 trailing, 10.4 forward) below that of the S&P 500 Index, the broader semiconductor industry, and the stock’s own history. The 10-year charts of Intel’s price-to-sales ratio and earnings yield tell a similarly positive story:

On balance, the fundamental news continues to indicate that Intel is a relatively “safe” company that investors can buy with confidence on any pullback. Still, anyone considering a purchase right now should wait for a better entry point. Following its gain of nearly 3% on Friday, the stock is up 14% from its recent low of mid-December and 37% since late August. Intel’s P/E, while low by the measures mentioned above, is at its highest level in more than a year.

In light of both the extent of the stock’s run-up and the nearly unbroken rally for the broader market in the past month, patience is warranted even in the wake of last week’s positive news.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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