Is Intel Surviving the PC Decline?

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

With PC sales falling (market researchers have estimated an 8% drop over the last year), we certainly wouldn’t say it’s a good time to be Intel (NASDAQ: INTC). The company recently reported its results for the third quarter of 2012, in which its revenue decreased by 5% versus the same period last year; with Intel struggling to cut costs, earnings ended up down 14%. However, the reported numbers were considerably higher than Wall Street analysts had expected, suggesting that the large tech company was not taking as many hits from industry trends as one might think. Intel did cut its guidance for revenue and for gross margins for the fourth quarter of the year, which likely contributed to the stock’s 3% decline on the release.

We see the sell-side expecting $2.13 per share in earnings in 2013, which is up only slightly from what Intel is expected to do this year. This earnings per share figure implies a forward P/E of only 10. Even though analysts do not seem particularly optimistic, the five-year PEG ratio is 0.9. Therefore, on a quantitative basis Intel (which, let’s recall, has a market capitalization of over $100 billion and pays a dividend yield of 4.1% at current prices, with a recent history of dividend increases) looks very much like a value stock. The company only has to match analyst expectations, or even slightly underperform them, in order to justify its current stock price. With the consensus for next year not being particularly optimistic, we think there’s a good chance of Intel getting there.

Lansdowne Partners, managed by Paul Ruddock and Steve Heinz, increased its stake in Intel by 9% during the second quarter and the company was one of the five largest positions in the fund’s 13F portfolio (see more stock picks from Lansdowne Partners). Renaissance Technologies, whose success made founder Jim Simons a billionaire, also added shares of Intel and owned a total of 17 million shares at the end of June (find more stocks that Renaissance Technologies owns).

The closest peer for Intel is competing chip maker Advanced Micro Devices (NYSE: AMD) (Read our recent article focusing on AMD). Now below a market cap of $2 billion -- the stock is down 51% year to date -- and unprofitable, AMD is not handling the shrinkage of the PC market as well as Intel is. In the second quarter of the year, its revenue was down 10% and its earnings were down 39% compared to the same period in the previous year. Based on analyst expectations the forward P/E is 25; that is high and we doubt that a declining company in a declining industry is going to start generating positive profits in just a couple quarters.

We can also compare Intel to Texas Instruments Incorporated (NASDAQ:TXN) and semiconductor companies Maxim Integrated Products (NASDAQ: MXIM) and STMicroelectronics N.V. (NYSE: STM). Texas Instruments and Maxim both trade at 21 times trailing earnings, a considerable premium to Intel, though these peers are not as dependent on personal computers. However, both saw their earnings decrease at double-digit rates in their most recent quarter compared to the same period a year earlier; revenue declined as well. Despite this, analyst consensus is for strong earnings growth in 2013, and their forward P/E multiples are in the 13-14 range. Again, this is well higher than where Intel trades. STMicroelectronics is unprofitable, but, like for AMD, Wall Street analysts expect positive earnings next year; it trades at 16 times their estimates for 2013. This is a higher multiple than at Intel, again, and depends on the company breaking into the black. Its revenue has been down, and we don’t think that it is a buy either.

When we look at Intel the company, we’re quite pessimistic. We doubt that revenue growth is going to be strong, or even weakly positive, for a while. However, the stock is cheap, and with a good dividend we think it is a buy relative to its peers.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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