Tuesday, October 26, 2010

Intel Stock Analysis

Value investors love a good bargain. Some of the best values in the stock market can be fund in the technology sector. Stocks like Apple and Amazon may be soaring but many great technology companies are selling at a discount to their true earnings power. One of these companies is Intel Corporation.

Intel is the dominant player in the chip market. The company is the largest semiconductor chip maker in the world. Intel derives a significant portion of its $42 billion dollars in revenue by supplying microprocessors to personal computer companies. The company’s chief competition in the PC chip market is Advanced Micro Devices.

Intel recently agreed to buy antivirus software and security market protection company McAfee for $17.68 billion dollars. The move will give Intel access to the mobile telecommunications market via smartphones. Intel can now bundle its chips with software protection. This will increase profits and margins in the existing PC, laptop, and tablet PC market. This differentiates Intel from AMD who has no such security offering.

Intel has a tremendous balance sheet as many tech bellwethers do. Intel has over $20 billion dollars in cash and just $2.5 billion dollars in debt. Intel generates tremendous free cash flow and has been able to grow earnings at a 7% clip over the past five years despite facing an economic slowdown. The next five years should be even better as the company is forecasting 12% earnings growth.

Intel recently posted impressive quarterly results. The company grew earnings 59.2% last quarter and increased revenue 18.2%. Operating margins were high at 39% and profit margins were just south of 25%. Return on equity was impressive at 24% and return on assets came in at 18%.

The stock is undervalued and trades at less than 1 times earnings growth. Intel’s shares have dropped recently as the company is forecasting slower growth for the chip market. The company appears to be trying to temper investor expectations. Intel has a history of guiding down and surprising Wall Street by performing better than expected.

Shares of Intel have been cheap for a while now. Intel trades just under 10 times next year’s earnings and has a dividend yield of 3.2%. This is nearly a full percentage point higher than the historical yield of 2.3%. At 63 cents per share the company is paying out just 33% of earnings via dividend distributions.

I would feel comfortably buying shares of Intel at the current price level. Intel’s stock is worth $23 per share.

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