Intel (INTC) is the Rodney Dangerfield of the stock market: it gets no respect whatsoever. Here we have a world-class company with impeccable financials and the dominant player in a global market, yet investors treat it like it is nothing. I don’t think this will last forever and believe that long-term investors can reap solid gains by buying it now.
Even after Intel warned that its sales would be lower than expected on Friday, the stock still rallied over 1%. This is a great indication that investors have said enough is enough and that too much negativity has been priced into the stock. If bad news won’t make the stock drop further, what will?
Certainly the weak economy and the fact that semiconductors are levered to economic growth is contributing to the stock’s terrible performance, but I feel that it is overdone. The valuation alone warrants picking up some shares because there is too much bad news priced into the stock. Intel is currently changing hands at only 9x this year’s earnings estimates of $2.04 per share. I remember when this was the quintessential growth stock trading at lofty valuations. It even pays a strong dividend of 3.3% annually.
The company is still incredibly profitable as the best in breed of its industry. This can be illustrated by its stellar 23% net profit margin and 33.7% operating margin. Compare this with chief competitor Advanced Micro Devices’ (AMD) paltry 4.4% operating margin. These fat profitability ratios suggest that Intel has developed a sustainable competitive advantage which is a desirable trait among investors.
Intel has made headlines by making the biggest acquisition bid in the company’s history. The semiconductor giant is buying McAfee (MFE) for almost $7.7 billion. Analysts are usually weary when a big acquisition is announced due to integration risks, but long-term this should be a winner. Management has shown the willingness to expand into a new arena, which is security in this case. I have faith in Intel’s management that it can make the integration successful and capitalize on McAfee’s dominant security position.
The bottom line is that investors are indiscriminately throwing quality away with everything else right now. The fact that Intel is trading at a single-digit price/earnings ratio with an above market average dividend yield speaks volumes in itself. Fair value for Intel right now would be about $25-$30 per share and much higher if the economy stabilizes and resumes its growth path.
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