Intel Is Back Where It Was in 1997

Yesterday, I highlighted Microsoft ($MSFT) and its relatively cheap valuation. Today I want to look at a stock that’s often paired with Microsoft: Intel ($INTC). The stock has been doing terribly lately. Shares of Intel are at a fresh 52-week low today. In May, Intel was over $29 and today the stock nearly broke below $20 per share. The stock first broke above $20 in early 1997. That was the same year that Intel’s CEO, Andy Grove, was named Time’s “Man of the Year.”

Intel’s last earnings report wasn’t terribly good, but Wall Street’s expectations were even worse. For Q3, the company earned 58 cents per share which was eight cents better than estimates. Earnings were down 11% from the same period one year before. Sales were down by 5%.

After exceeding analysts’ expectations following the 2007-2008 financial crisis, the company’s sales in recent months have slowed as demand for its microchips has weakened. Fearing the trend could continue, several analysts last week cut their estimates of the chipmaker’s financial prospects, sending its stock price to its lowest level in a year.

While the sluggish worldwide economy has contributed to Intel’s troubles, a more fundamental worry is its dependence upon personal computers. Its brainy microprocessors power about 80 percent of PCs, whose sales have dwindled as consumers have turned to smartphones and tablets. As a result, Intel is trying to get its chips into those mobile devices.

The company is beginning to have some luck in that regard. But its chips face intense competition from those using an alternative design from British firm ARM Holdings. Traditionally consuming less energy and, thus, providing longer battery life, the ARM camp dominates the mobile device market.

Even if Intel has success with its push into smartphones, the company is likely to remain so dependent on the stagnant PC market that its finances probably won’t improve much over the next 18 months, according to a note Bernstein Research sent their clients last week.

Now let’s look at some numbers. Intel currently pays a quarterly dividend of 22.5 cents per share. This was raised from 21 cents per share earlier this year. At 90 cents for the year, a $20 share price works out to a big fat yield of 4.5%.

Intel’s earnings estimates for next year have been dropping like a stone. Three months ago, the Street had been expecting 2013 earnings of $2.55 per share. Today the consensus is for $1.97 per share. By my simple valuation method, Intel has a fair value of $27.41.

Posted by on November 14th, 2012 at 1:10 pm

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