On September 7th, Intel Corporation (NASDAQ:INTC) reduced its internal estimates of revenue for the third quarter of the year. The announcement that revenue would be about 8% lower than previously expected caused the stock to drop about a dollar on the day, or 4%. On a quantitative basis, Intel appears to be getting close to value territory. Even with this negative news coming in, investors might consider buying the stock confident that Intel will find a place for itself in the rapidly evolving consumer computing space. At a market capitalization of about $120 billion, the chipmaker trades at 10 times trailing earnings; little EPS growth is expected next year, and so the forward P/E multiple is 10 as well. Wall Street analysts expect moderate growth in earnings per share over the next several years, yielding a five-year PEG ratio of 0.9; while the sell-side may end up revising its targets lower in response to Intel’s announcement, barring any radical shifts the stock will probably still end up fairly priced according to analyst consensus. In addition, Intel Corporation pays a dividend yield of 3.7%. With plenty of cash on its balance sheet- $14 billion, about twice as much as the company’s total debt- maintaining its dividend should not be a problem and Intel should continue to pay it unless it comes across a better use of cash. We could see Intel being a value/income stock at these levels.
Intel Corporation has not been doing well recently, but it hasn’t been in a sharp decline either. During the second quarter of 2012, revenue actually edged up 4% compared to a year earlier though higher expenses caused income to decline 4%. However, the increase in expenses was led by a 27% increase in R&D: if R&D had been held constant, earnings would actually have increased by about 10%. Obviously we can’t know how productive this investment will turn out to be, but management seems to think that the cash is better used to develop new products. In the first half of the year, Intel spent $4.9 billion on research and development compared to $3.9 billion in the same period in 2011. Again, this increase was the primary reason why net income declined despite low revenue growth. It should also be noted that Intel reduced its share count by 6% in the twelve months ending June 2012- it is not only paying dividends, but also repurchasing shares.
Lansdowne Partners, a multi-billion dollar hedge fund managed by Sir Paul Ruddock and Harvard Management alum Steve Heinz, increased its Intel position by 9% in the second quarter to a total of 20.2 million shares (find more stock picks from Lansdowne Partners). Billionaire Ken Fisher’s Fisher Asset Management reported a position of 19.3 million shares, essentially unchanged from the end of March; it owned roughly the same number of shares at the end of 2010 (see Ken Fisher’s portfolio). Intel is also one of Renaissance Technologies founder Jim Simons’s long-term holdings (see Jim Simons’s long-term holdings).
Competitor Advanced Micro Devices, Inc. (NYSE:AMD), despite being significantly smaller than Intel ($2.5 billion market cap), is the company’s closest peer. It trades at only 8 times next year’s earnings but its business experienced a larger decline last quarter (revenue fell 10%, contributing to a 39% fall in earnings) and it pays no dividend; given these factors, and that Intel is the clear market leader, we would rather own the larger company at a slightly higher multiple. ASML Holding N.V. (NASDAQ:ASML), Applied Materials, Inc. (NASDAQ:AMAT), and ARM Holdings plc (NASDAQ:ARMH) are three other peers. ARM Holdings, a provider of energy-efficient chips, is the growth play of the bunch: it trades at 54 times trailing earnings but on a forward basis this multiple falls to 31. In its most recent quarter, earnings rose 48% compared to a year earlier. It’s an interesting growth story but we think the valuation might still be too high. ASML and Applied Materials trade at P/Es of 15 and 12, respectively; like AMD, they suffered sharp declines in earnings last quarter. We’d rather own the cheaper, more stable, and market leading Intel.
