Is Intel Still a Safe Bet?

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the wake of a few incidents an average investor might think that Intel (NASDAQ: INTC) has started losing its sheen in the market. But I beg to differ! And with this article I hope to convince you.

Before we dive into Intel and its strengths, it would make sense to understand the fear surrounding the stock. The early retirement plans of Intel CEO Paul Otellini are surely one of the issues. Another absurd piece of news that seems to be spreading is related to the “end of the PC saga;" I call it absurd because I honestly don’t see the tablet market consuming the office sector any time soon! News of this sort has been doing its rounds in the market. And to top it all, we have the issue of uncertainty among investors; they feel that Intel simply has been doing too well for too long.

So which of the above reasons should cause investors to worry? I feel that Paul Otellini’s early retirement should be a point of concern. Before Paul Otellini took over Intel, everything was in bad shape, and consequently we saw a large number of smaller competitors overtaking Intel. It was Paul Otellini who revamped things for Intel. For those of you who don’t know, here are some of the highlights of Paul Otellini’s management:

Intel dominated the PC processor market.

Intel became one of the most dominant server processor vendor.

Intel produced an impressive chipset that was included in a wide range of Apple products including MacBook, MacPro and iMac.

Intel became one of the few companies that didn’t cut down on R&D even during the financial crisis, which in turn helped produce a staggering revenue of $54 billion in 2011, which was an impressive 23% improvement when compared to 2010.

Now the question is will Paul Otellini’s retirement alone make Intel a very unattractive stock? The answer is a plain no, because Intel has a huge list of strong products that are genuinely powerful when compared with its peers. The Intel line of processors include Xeon Phi, 64 bit instructions for its Itanium processors, dual-core Atom processors for smart phones (due to hit markets in 2013), and recently introduced E3 (Ivy Bridge based) and E7 (Haswell based) processors.

As of now Intel doesn’t really have strong overall competition; its closest competition in the central processor market would be Advanced Micro Devices (NYSE: AMD), which is a company that genuinely caters to the average consumer. They held a market share of about 18.8% in the last quarter of 2011 it’s pretty small when compared to Intel 80.3% in the same quarter. But here again AMD is in no position to be compared with Intel; Intel has a market cap of $99.97 billion, while AMD only has about $1.40 billion.

AMD is priced at about $2.00. The problem that I see with this stock is that the earnings per share are at $-1.20, which would mean that it would be very difficult for the company to grow. If you are lucky the stock might hit $2.90 in about a year’s time, but nothing beyond that. Let’s hope that the new line of products from AMD will help its cause.

However, in the mobile market, Intel faces strong competition from ARM Holdings (NASDAQ: ARMH). ARM has found its way into the iPhone and a couple of Android-based devices. According to Intel, the mobile sector is one which involves a lot more competition and hence a lower margin, and this is precisely what ARM seems to take good advantage of.

ARM shares are priced at about $37. As the company runs on low margins, their earning per share seems to be a little low at $0.51, and in turn the PE ratio is very high at 73.35. The stock gives a dividend of $.1607. The company is said to face a lot of competition in the coming quarters and I expect this stock to come down to about $35 in a couple of quarters time.

Amidst such weak competition, I feel it would make sense to say that Intel will continue to put on a good show. Intel has strong earnings per share at $2.29, and they pay out a dividend of $0.90. The current yield is at about 4.5%. The PE ratio is slacking slightly at 8.77; the forward PE ratio is at about 9.5. If everything goes well, we can expect the stock price to jump to around $23 in about a year’s time.

I personally feel that Intel is still a safe bet. The company has been doing well over the last year; it recorded a 23% increase in sales in 2011. The company has a lot of new products down the line. And most importantly, this company has proven it can provide investors with decent returns even through tough times.

ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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