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Intel Earnings: Hit or Miss, INTC Is a Buy

Intel (INTC) releases its fourth-quarter earnings on Thursday, and judging by Tuesday’s price action — INTC stock finished up nearly 4% on the day — investors are optimistic. In fact, since September, Intel shares are up about 20%, far outpacing the S&P 500.

The consensus analyst forecast is for Intel earnings to come in at 52 cents per share, though Intel has been full of surprises of late. Last quarter, Intel earnings beat estimates by a whopping 9%.

Interestingly, while analysts have been raising their estimates for fourth quarter 2013 (see table), in the past 30 days, 11 of 39 analysts have lowered their forecasts for Q1 2014, and 14 out of 45 have lowered their forecast for full-year 2014. The consensus rating is “hold,” which is code for “sell” in analyst-speak.

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Now, I don’t pretend to have inside information here, but the consensus seems awfully bearish, particularly given that Intel’s problems are nothing new. Intel depends heavily on PC sales to generate demand for its processors, and PC sales have been in decline for seven consecutive quarters.

One major factor in the decline in PC sales is long-term in nature and won’t be changing any time soon: the emergence of smartphones and tablet as a viable alternative for basic computing tasks. But there are also shorter-term factors at work, such as a weak global economy with high unemployment and a general revolt against Microsoft’s (MSFT) Windows 8 by both consumers and businesses.

Well, improvement on the employment front is happening sporadically, as last month’s job report showed only 74,000 jobs being created in December. But with the new-and-improved Windows 8.1 rounding off some of the more unpleasant edges of Windows 8, I expect to see resistance from both consumers and corporate IT departments slowly melt away.

And naturally, PC chips are not Intel’s only line of business. A little more than 20% of Intel’s revenues come from its server business, and this has been a great source of growth in recent years. The Data Center Group enjoyed 12% revenue growth last quarter, and I expect to see robust growth here for the foreseeable future. The rise of cloud computing has created new demand for server chips, and this is not a trend I see reversing.

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Based on everything I’ve said so far, INTC stock would be worth buying at current prices. It trades for 14 times expected earnings and yields 3.5% in dividends, making it attractive as a bond substitute if nothing else. And unlike bond coupon payments, Intel’s dividend has a very high probability of rising in the years ahead.

But what if Intel actually turned out to be more than a slow-growth legacy tech company? What if — just maybe — it found a new source of revenue and INTC stock became a growth story again?

Well, as it would turn out, I think that is highly likely. I recently wrote that Intel’s aggressive move into the “Internet of things” could make Intel the next Apple (AAPL). I realize that this is a controversial statement, but remember that in 2000, Apple was an also-ran in the PC wars before the iPod transformed the company into the world’s premier gadget company. And as the concept of the “smarthouse” gains steam, you’re going to see Intel chips in everything from your refrigerator to your baby’s pajamas.

I expect that Intel earnings will come in at least as good as the consensus estimates this quarter. But hit or miss, I consider INTC stock to be an attractive buy.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long INTC and MSFT. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich. This article first appeared on InvestorPlace.

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My Favorite Tobacco Stock is…Intel?

Yes, you read that correctly.  My favorite “tobacco stock” is Intel Corp (Nasdaq:$INTC).

Lest you think I’ve lost my mind, I am aware that Intel does not sell or market cigarettes or other tobacco products. Intel is the world’s premier designer and manufacturer of computer processors.

But while Intel is not a tobacco company, it most certainly is a tobacco stock, or at least it shares many of their characteristics.

This requires a little explaining.  If you’ve read some of my past posts, you are probably familiar with my reasons for liking tobacco stocks over the long haul, even if I recommend avoiding them at current prices (see The Price of Sin and Time to Stop Bogarting Cigarette Stocks).  Because of the social stigma associated with vice investments like tobacco, alcohol and firearms, many institutional investors shun them, either by choice or by socially-responsible investment mandate.  This causes sin stocks to be priced as perpetual value stocks, with the low valuations and fat dividends that this entails.

Well, I admit, in this particular respect Intel has nothing in common with tobacco stocks (even if it is priced like one at the moment).  It’s hard to find a scale by which Intel would be considered socially irresponsible. But let’s take a look at some of the other characteristics that make tobacco stocks—and Intel—interesting.

Tobacco companies have gargantuan barriers to new competition—what Warren Buffett might call an unassailable moat.   Given the legal and political risk and the size and scale needed to deal with both, it would be next to impossible to start a new tobacco company now.  You would need infinitely deep pockets and decades’ worth of political connections. As a result, Big Tobacco has become an entrenched oligopoly in which a handful of players—such as Altria (NYSE: $MO), Reynolds American (NYSE:$RAI) and Lorillard (NYSE:$LO)—completely dominate.

But even if you could start a new tobacco company, why would you?  It’s not exactly a business with a bright future.  In the developed world, tobacco is a business in steady but terminal decline.

This brings me back to Intel.  I’m actually in the minority among investors at the moment in that I see a bright future for Intel.  No, they haven’t figured out mobile yet, but they will.  As mobile devices become more and more sophisticated, they will need the power than only Intel can provide.  And there is also the server business, which accounts for roughly a quarter of Intel’s revenues.  Ironically, while Intel has yet to really break into mobile, its server business has benefitted handsomely as the mobile revolution has created greater demand for cloud services.

Yet this is not how the market views Intel right now.  No, Intel is a company resigned to gentle decline, as its core PC market inevitably shrinks.  From the way Intel bears talk, PC users are disappearing from polite company faster than smokers, forced to type on their physical keyboards in alleys behind buildings or in doorways.

For the sake of argument, let’s assume they’re right.  Intel would still be a buy at current prices.

As the Big Tobacco has proven for decades, companies in declining industries can make excellent investments under the right conditions.  If you have a dominant market position (think back to Warren Buffett’s “moats”), a conservative balance sheet, and have ample cash flow for share repurchases and dividends, you can do quite well by your investors even in a shrinking market. It’s worked for Big Tobacco investors, and it will work for Intel investors as well.

At just 9 times earnings, Intel is priced significantly cheaper than any major tobacco stock, and its dividend is competitive at 4.3%.  I might add that Intel’s dividend has risen by over 40% in the past two years and that its dividend still only accounts for 37% of (depressed) earnings.

Buy Intel and reinvest your dividends.  If I am right, Intel will regain its place among America’s most reputable growth stocks.  But even if I’m wrong, Intel is positioned to offer “tobacco like” returns for the foreseeable future.

Note: The “Intel is a tobacco stock” concept was conceived during a podcast interview with InvestorPlace Editor Jeff Reeves in which we each discussed our picks in the 10 Best Stocks of 2013 contest.  Jeff’s choice was Intel; mine was German luxury carmaker Daimler (OTC:DDAIF).

Disclosures: Sizemore Capital is long INTC and DDAIF

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Listen to Charles Sizemore and Jeff Reeves Discuss Their Favorite Stocks for 2013 on The Slant

With the 2012 InvestorPlace Best Stocks contest completed, the contestants are gearing up for 2013.   Listen to Charles Sizemore and Jeff Reeves discuss their 2013 picks and offer their outlook on the year ahead.

If you cannot view the embedded video player, please follow this link.

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Beware the Crap Rally

The last few weeks have seen a rally in…well…for lack of better word, “crap.”

Before Tuesday’s correction, Research in Motion (Nasdaq: $RIMM) had risen 37% since just the beginning of this month and had nearly doubled from the low hit over the summer.

Facebook (Nasdaq: $FB), the company that may be remembered as the most disappointing IPO in decades, is up more than 36% in just the past two weeks.

Even Dell (Nasdaq: $DELL), the perpetually cheap PC maker that has struggled to stay relevant in the age of cheap Chinese competition and from upstart tablets and smartphones, has shown signs of life. The stock is up 13% in just the past week and a half.

What’s going on here?   Do investors really see value in these tech disappointments, or is this just the mother of all short-covering rallies?

It’s a little of both.  Let’s take a look at each company separately.

Research in Motion has been a real frustration to me as a former bull.  This was the company that invented the smartphone and as recently as a year ago could have remained the dominant player in the corporate market had they played their cards right.

Alas, they didn’t play their cards right.  In fact, they didn’t really play their cards at all.  For the life of me, I can’t figure out what the company has been doing for the past two years.  BB10—the new operating system that is supposed to compete with Apple’s (Nasdaq: $AAPL) iPhone and Google’s (Nasdaq: $GOOG) Android phones—is scheduled to be released in February of next year.  That’s almost a year later than originally planned, assuming they meet the deadline.  And given the company’s recent history, that is not a certainty.

You almost have to work to screw things up as badly as RIMM did.   Even after the company started to fall behind its rivals, it had assets of real value.  Its BBM messenger is still the best texting and instant messaging program on the market, and it could have been monetized as a standalone app for sale in the Apple and Google app stores.  But it wasn’t, and every day that passes it becomes less relevant as its pool of current users dwindles.

I still see value in RIMM’s Mobile Fusion platform, which allows corporate IT departments to manage iPhones and Androids on the equivalent of a BlackBerry Enterprise Server.  But there is a very significant risk that the company will fail before they have time to fully develop this.

RIMM still looks cheap—on paper.  It has roughly $2 billion in cash and an estimated billion or so in patents.  Backing these out, the value of RIMM as a going concern is currently only about $2-3 billion.  A good activist investor could buy RIMM, chop it into pieces, and sell off its parts at a profit.  But before that happens, management will probably destroy a lot more value first.

It’s simply too late for BB10 to save RIMM.  A year ago, I think it would have had a chance.  But at this point, the company has too much baggage, and they are fighting for turf among the business crowd with a resurgent Microsoft (Nasdaq: $MSFT). (See “Microsoft Will Crush Google“)

Don’t get drawn into RIMM.  It’s a sucker’s rally.

But what about Facebook?

My wife and I have a rule of thumb for technology products.  Once our respective mothers use it, it’s over.  This is not to say that the company is going out of business, but its high-growth phase is clearly over.  When our mothers are using it, there is no one left to join.

Well, both of our mothers are now avid Facebook users.

You should take my “Mother Indicator” with a grain of salt, of course.  But given that Facebook trades for 40 times next year’s expected earnings, my concerns about growth start looking valid.  Facebook’s profits would have to grow at torrid pace in the years ahead for that valuation to be anything short of ludicrous.

Zuckerberg & Co. are anything if not creative (“ruthless” is another word that comes to mind), and I have no doubt that Facebook will find new ways to monetize its assets.  But the company depends mostly on paid advertising, which is not a proven model yet in the world of social media.  And rival Twitter seems to be getting more buzz these days.

Facebook is a $50-billion company with a questionable business model trading at a nosebleed valuation.  If you buy it, you are betting big on Zuckerberg’s ability to innovate.  I’m not willing to make that bet at current prices.

Finally, let’s look at Dell.  Dell is a good company in a terrible industry.  They make good computers and laptops, but both are commoditized products.  There simply isn’t much premium to be charged for selling a “good” PC these days.  All of the profit goes to Microsoft, the maker of the operating system, and Intel (Nasdaq: $INTC), the maker of the processor.

That said, Dell is ridiculously cheap, even for a seller of a commoditized product.  It sells for just 6 times expected 2013 earnings and for just 0.29 times sales, and at $9.77 per share its price is barely above the crisis lows it hit during the 2008-2009  meltdown.

Dell also has no net debt, a respectable return on equity of 27%, and a dividend of 3.4%.

There is a lot of bearishness towards Dell for the same reason that there is a lot of bearishness towards Microsoft and Intel.  Computers are no longer a growth industry. While I consider them far from “dead,” tablets and smartphones are creeping deeper and deeper into territory once dominated by PCs.   Investors simply have no interest in owning shares of yesterday’s tech darling.

And herein lies a potential opportunity.  Dell is interesting contrarian value play.  If you believe, as I do, that there is plenty of room for PCs, tablets, and laptops on the desks and in the lives of most consumers, then Dell should have a viable future.  And given that no one—as in not a single investor I have met in years—has any interest in owning Dell right now, your downside should be tolerably low.

If sentiment improves even modestly towards PCs, Dell could be an easy double over the next 12-24 months.

Disclosures: Sizemore Capital is long MSFT and INTC.  This article first appeared on InvestorPlace.

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