Is This Semiconductor Stock a Buy?

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

In mid-July, Intel (NASDAQ: INTC) reported its results for the second quarter of the year. Revenue was down 5% versus a year earlier, as shifts in consumer preferences continue to reduce demand for PCs and therefore, for many of Intel’s products. Operating expenses, including R&D and SG&A, have not changed much and as a result, the company recorded a 29% decline in net income. This is about in line with what Intel had experienced in the first quarter of the year. Markets have not been very positive on Intel’s prospects over the last year, and as a result, the stock price is down 9% while the S&P 500 index has risen 25% over the same period.

Intel currently trades at 12 times trailing earnings; while Wall Street analysts expect some degree of increase in earnings per share next year (aided, one would assume, by a continuation of the company’s buyback program), the level of improvement they are looking for is low, and so, the P/E multiple is 12 on that basis as well. Generally, at that valuation, investors should expect at least small increases in earnings per share in the future, so Intel would have to hold its net income steady going forward (and then generate EPS growth through repurchases) in order for the current price to make sense in value terms. As with many troubled tech companies, Intel does offer a high dividend yield (at least for now) at 3.9%, and so, income investors who are comfortable with its prospects may want to consider it.

Who owns it

Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). According to our database, billionaire Ken Fisher’s Fisher Asset Management owned about 19 million shares of Intel at the end of the first quarter of 2013 (find Fisher's favorite stocks). Renaissance Technologies, founded by billionaire Jim Simons, reported a position of a little less than 17 million shares (see Renaissance's stock picks).

Comparing Intel to its peers

The closest peer for Intel is Advanced Micro Devices (NYSE: AMD), and it can also be compared to Texas Instruments (NASDAQ: TXN) ,and to Microsoft and NVIDIA (NASDAQ: NVDA), given those two companies’ exposure to shifting consumer tastes.

Microsoft is coming off a big earnings miss, which sent the stock down about 10%. It now carries trailing and forward P/Es of 12 and 10, respectively, though investors should be wary of the company’s recent performance and the fact that earnings are likely to be temporarily higher thanks to new versions of Windows and Office. Advanced Micro Devices has also struggled recently, with adjusted earnings being negative in each of the last four quarters, and analysts are expecting net losses for this year as well. Revenue has been down over 10% from its levels a year ago, and 16% of the float is held short as many market players are bearish on the company.

NVIDIA managed to improve on both top and bottom lines in its most recent quarter compared to the same period in the previous fiscal year, but the sell-side considers the company’s growth short lived: they expect earnings per share to be lower in the fiscal year ending in January 2015 than what NVIDIA has done on a trailing basis. With the forward earnings multiple being 17, investors should probably avoid the stock for now.

Texas Instruments has been seeing weak revenue numbers, with little change in operating profit. The stock is valued at more than 20 times trailing earnings, a pricing which seems somewhat aggressive and certainly depends on the company delivering higher profits in the future. It does offer a dividend yield of 3%, but the combination of its recent financial performance and its valuation is not appealing.

Conclusion

Intel generally trades at a discount to its peers, whose valuations are often at a level where investors are counting on increased earnings going forward. In absolute terms, however, the valuation of 12 times trailing earnings is tough to justify considering that financials have been weak recently, and that this can be attributed to what are likely to be permanent shifts in the consumer technology landscape. Buybacks can help, but would not be enough by themselves to reverse the impact on EPS of continued declines in Intel’s business.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in MSFT. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of 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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