Tag Archives | Intel

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.

intel-earnings-table-intc-stock

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.

chart

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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At Current Prices, Tobacco is No-Go

Back in December, I recommended that readerswatch their ash when investing in tobacco stocks.  In their hunt for yield in a seemingly yield-less world, investors had bid the price of most tobacco stocks to levels that no longer made sense.

Tobacco is a no-growth business and an industry in terminal decline.  As a case in point, American teenagers are more likely to use illegal drugs that to light up a cigarette.

In the circular logic of the stock market, the lack of growth is part of what has made tobacco stocks such fantastic investments in recent years.  Management doesn’t have to reinvest in the business or to fund an expensive marketing budget.  And there are no white elephant projects or unrealistic management spin.  They understand the economics of their business, and they do the only things that make sense: they pay out gargantuan dividends and aggressively buy back their shares.

But the key here is investor expectations.  Investors had low expectations for the sector and were unwilling to pay up for earnings. Ultimately, the success of any investment depends on the price you pay, and tobacco investors were able to enjoy monster returns precisely because the stocks were cheap.

Well, they’re not anymore.  Not by a long shot.  By Wall Street Journal estimates, the forward P/E on the S&P 500 is 13.5.  Philip Morris International (NYSE:$PM) is significantly more expensive than that, and Altria (NYSE:$MO) and Lorillard (NYSE:$LO) are essentially at the same valuation.

Company

Ticker

Forward P/E

Dividend Yield

Payout Ratio

1-Yr Div. Gr. Rate

Philip Morris International

PM

15.5

3.90%

63%

10%

Altria

MO

13.5

5.10%

83%

7%

Lorillard

LO

13.4

5.20%

71%

19%

Intel

INTC

9.9

4.20%

41%

7%

Microsoft

MSFT

8.6

3.30%

45%

15%

Cisco Systems

CSCO

10

2.70%

23%

75%

 

This should not be.  Tobacco stocks should not be more expensive than the rest of the market.

Yes, all pay significantly more in dividends than the S&P 500, which pays a pitiful 2.0%.  But look at the payout ratios.  All pay out the majority of their earnings as dividends, whereas the payout ratio of the S&P 500 is less than 30%.

Meanwhile, take a look at the technology stocks at the bottom of the chart.  Intel (Nasdaq:$INTC), Microsoft (Nasdaq:$MSFT) and Cisco Systems (Nasdaq:$CSCO) all trade for 10 times or less expected earnings, and all have modest dividend payouts with plenty of room for growth.  They pay a little less in dividends than tobacco stocks…but not that much less.  And their dividend growth rates are comparable (with the exception of Cisco, whose growth rate is off the charts).

Last month I joked that chipmaker Intel was my favorite “tobacco stock,” arguing that Intel had quite a bit in common with the likes of an Altria and its peers:

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.

The same could be said for Microsoft and Cisco.  Tech is the new tobacco.

To be fair, tobacco companies have certain advantages that “tobacco companies” like Intel lack.  A chemically-addicted clientele, for starters, as well as an unrivaled ability to raise prices virtually at will.  Whenever a progressive-minded (or cash-strapped) city decides to hike the taxes on cigarettes, the taxes flow right through to the customer.  Not too many companies have that ability.

But that said, I’m betting that Big Tech is a better investment than Big Tobacco.  Investors are expecting no growth from Big Tech.  So, if actual results prove to be even marginally better than disastrous, investors should enjoy a decade or more of solid gains.

Microsoft and Intel in particular may or may not ever figure out the mobile market.  But that’s ok.  Given that a zero percent probability is currently priced into shares, mobile success can be thought of as an embedded call option that could end up paying off in a big way.  And if that option is never exercised, you’re still getting the existing businesses at “tobacco” prices.

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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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