Buying Intel with Analyst Assistance

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

Any investor that has been considering an allocation to Intel (NASDAQ: INTC) owes a big ‘thank you’ to the various analysts that downgraded the stock and caused the nearly 3% selloff during Tuesday’s session that brought shares to a new 52-week low.

At the center of the downgrades are continued concerns over the fate of the PC market and the belief that gross margins will come under pressure. I have long maintained that “rumors of the death of the PC have been greatly exaggerated,” and that Intel is one of the most masterful managers of information in the market. As such, the recent decline should be seen as a buying opportunity that has made the stock even more attractive.

The Downgrades

Analysts at both R.W. Baird and Nomura recently downgraded Intel based primarily on the shared belief that gross margins will come under pressure; concern over the PC market was also a common element. Baird analyst, Tristan Gerra, said “Intel inventories are too high and will hurt gross margin in 4Q, in our view. Intel inventory days exited 2Q12 at the highest level since 4Q06, and likely increased in 3Q given the shortfall in revenue relative to Intel’s previous expectation.” While the report noted that notebook sales surged in September, he believes end-demand remains weak. Mr. Gerra lowered his target for Intel from $32 to $26.

Romit Shah of Nomura noted that where Intel has used the strength of its balance sheet to drive EPS growth, specifically with share buybacks, falling gross margins will make this approach less realistic. Mr. Shah has a “reduce” rating on the stock, with a price target of $22. He cuts his quarterly EPS expectation from $0.55 to $0.52. Intel shares fell on the downgrades during a session that was generally weak for technology.

The PC Market

While the above referenced reports do not paint a particularly favorable picture of Intel, both are limited in their overall vision of the market. In the context of a stable market, big-firm analysts who have access to copious data, expertly crafted models and company management are a great resource for compiling reports that project recent events into the future. Fortunately or unfortunately, depending on your perspective, these are not normal market conditions.

The PC market is in a state of extreme fluctuation and is on the cusp of a major shift, particularly on the retail level. While tablets have yet to replace PCs, including notebooks, for the productive activities for which we use computers – the production of documents, reports, spreadsheets, presentations and term papers – individuals are pushing in that direction. The explosion in the use of smartphones and tablets is putting pressure on PC-makers like Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ) to reinvent the PC in the tablet form factor. Microsoft’s (NASDAQ: MSFT) impending release of Windows 8 has already sparked each of these three players to design tablet-notebook hybrids that should go a long way to bridge the gap.

Under this shifting paradigm, adoption rates are hard to quantify until these products are available for sale. While I have no specific data, I would imagine that many individuals who are nearly ready to upgrade either their notebooks or tablets are waiting for a device that might replace both. The Microsoft Surface, or one of the offerings from Dell or H-P, is expected to meet this demand.

Intel for 2013

While Intel may, in fact, be facing certain revenue pressures, the future continues to look very bright. In addition to potential sales driven by the release of Windows 8, Intel is expected to carve out an increasingly large segment of the wireless chip market in the year ahead. Where most major smartphone makers currently look to Qualcomm (NASDAQ: QCOM) for 4G LTE chips, Intel continues to have a significant presence in Europe. Intel is expected to release its own LTE chip early next year and begin competing with Qualcomm. With the company’s superb talent at fabrication and efficiency, this development has the potential to change the overall tenor of the market.

The Trade

Intel looks very solid a current levels, despite its recent guidance warning and the recent downgrades. When you throw in a dividend yield that has reached 4% on the stock’s slide, the shares look even more attractive. Overall, Intel continues to offer a nice balance between solid income and very real growth potential, particularly if you believe that the PC market is in flux not in trouble. Courtesy of the analysts, Intel is a strong buy at current levels.

 

Dig Deeper

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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel, Microsoft, and Qualcomm. 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. If you have questions about this post or the Fool’s blog network, click here for information.

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