Estimates have risen sharply for Intel Corporation (INTC) after the company reported very strong third quarter results on October 18. The chip maker set new records for microprocessor units shipped, revenue and earnings in Q3.
It was also the company’s 11th consecutive positive earnings surprise.
Fears over new technologies destroying the PC market have driven valuations to very attractive levels. Considering Intel’s growth opportunities in the emerging markets, this stock looks very attractively priced at just 9x forward earnings.
The company has also been aggressively buying back stock and raising its dividend. It currently yields a solid 3.5%.
Intel is a Zacks #2 Rank (Buy) stock.
Third Quarter Results
Intel reported better than expected results for the third quarter on October 18, setting new records for microprocessor units shipped, revenue and earnings.
Revenue surged 28% year-over-year to $14.233 billion, well ahead of the Zacks Consensus Estimate of $13.845 billion. The increase was driven in large part by double-digit unit growth in notebook PCs. It doesn’t look like tablets have made the PC obsolete just yet.
Approximately 64% of Intel’s revenues are derived from the PC market.
Revenue was up across all geographies too, including 35% in the Americas and 26% in Asia-Pacific. Approximately 57% of total revenue came from the Asia-Pacific region in Q3.
However, the gross margin did decline 170 basis points to 63.4%. Meanwhile, operating income was up 20%.
Earnings per share came in at 65 cents, beating the Zacks Consensus Estimate by 4 cents. It was a stellar 25% increase over the same quarter in 2010.
Outlook
Analysts almost unanimously raised their estimates for both 2011 and 2012 following strong third quarter results, sending the stock to a Zacks #2 Rank (Buy).
As you can see in Intel’s Price & Consensus chart, analysts have been steadily raising their estimates over the last several months as the company has delivered an average positive earnings surprise of 14% over the last 4 quarters:
Although new technologies pose a threat to the PC market in the developed world, PC sales in the emerging markets are booming. This should help drive strong revenue and earnings growth at Intel for years to come.
Based on current consensus estimates, analysts project 19% EPS growth this year and 4% growth next year. Its 5-year expected growth rate is 10.1%.
Returning Value to Shareholders
Intel generates tremendous amounts of free cash flow and has been returning much of that to shareholders through share buybacks and dividend hikes.
In the third quarter alone, Intel spent a whopping $4.0 billion repurchasing 186 million shares of common stock. The company has over $14 billion authorized under its stock buyback program. That should help drive EPS too.
The company has also been aggressively raising its dividend over the last several years. Since 2000, Intel has increased it at an average annual rate of 25%:
It currently yields a stellar 3.5%.
Valuation
The valuation picture looks attractive for this wide moat business. Shares trade at just 9.3x 12-month forward earnings, a significant discount to the industry average of 12.0x and its 10-year median of 18.6x.
It sports a PEG ratio of 0.9.
Intel’s price to sales ratio of 2.7 is a premium to the industry average of 1.8, but this is more than justified given the company’s ridiculously high profit margins.
The Bottom Line
With another blowout quarter in the books, rising earnings estimates, a solid 3.5% dividend yield and very reasonable valuation, Intel offers lots of upside potential.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
