Doing a Little Intel on Intel

June 7, 2011 | 0 comment

As of today, Intel (INTC) stands at roughly $22 per share, almost the same level that it crossed in July 1997. The stock has been dead money for 14 years and counting. However, is the time is to consider purchasing Intel for what may be another move up not seen since the end of 1990’s?

Looking at the fundamentals of Intel we know that Intel’s management is able to return well over 15% on its investments with a profit margin of 26%. The market cap of Intel is three times larger than its nearest competitor- Texas Instruments (TXN) and 20 times larger than Advanced Micro Devices (AMD). When we compare its operating margin of 35% to that of the industry average 10%,it’s hard to argue that Intel is not top dog.

From the growth perspective, Intel certainly has a history as an all-around “class leader” and as a solid stewardship of shareholder profitability. Since 2006, Intel has provided investors only one unprofitable quarter, which was in Q2 of 2009, during what many consider to be the “generational market bottom.” Intel stands to reap the benefits of the capital investments spent over the past several years. This has laid the groundwork for newer and more innovative products and because of this they are hands down the leader in their core chip business, with very little competition. Intel’s willingness to venture outside the core chip business and to compete in faster growing niche chip segments once dominated by other companies should drive growth further. We’ve learned not to bet against INTC, and we believe revenues will rise at a rate that is above INTC’s more historical growth rate.

But this is only one part of the story: Intel is even more compelling from the value side as it trades at 10x forward earnings. This is clearly lower than many other technology companies, but then again many now classify Intel as a mature company. The stock is yielding 3.3% with a debt rating of A+; which many argue is higher and perhaps more “sound” than US Treasury debt at this point. If one had a long-term time horizon, then it would make sense to hold Intel stock as if it were a bond.

At the current price, and taking into consideration the end of the Federal Reserve’s QE-2 campaign we could see the stock trade down to below $20 per share. This would represent a bargain, as the yield would then trade at roughly 3.8%. Intel could also be seen as a flight to safety during the next “Black Swan” event always lurking around the corner. If the recent commodities boom continues coupled with the falling dollar Intel could act as an inflation hedge. So is it fair to compare Intel’s 10x forward P/E and a 3.8% yield to that of the safety of the 10-year US Treasury Bonds? You be the judge.

This article was written by Sean Farhy. Sean Farhy is the Senior Equity Analyst and Head Trader of Rhodes Capital Management. Sean Farhy has been trading stocks and option for nearly 20 years.

Richard Rhodes is the founder of Rhodes Capital Management, Rhodes Trading Group, and The Rhodes Report a macroeconomic and stock trading newsletter. The Rhodes Report seeks an absolute return through a long short strategy that trades equities, ETFs, and inverse ETFs that offer the greatest potential for positive portfolio returns in both bull and bear markets.

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