Is this Technology Bellwether about to Awaken from its Long Sleep?
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The technology sector continues to look more and more appealing and investors should ensure their value seeking endeavors start here. First off, the S&P 500 Technology Sector is trading at one of its cheapest valuation levels since the early 1990’s, excluding recessionary periods. The current price-to-earnings multiple of 15x is quite attractive given the continued long-tail growth opportunities that Intel’s 1971 microprocessor ushered in. And this is exactly where investors should turn their attention, to the company that made one of the greatest inventions of the 20th century.
Intel (NASDAQ: INTC) stock has recently moved to a five-year high and looks poised to break out of its ten-year slump. They are the largest microprocessor company in the world and hold an astonishing 80% market share in the computer processing market. Their historic rival, Advanced Micro Devices (NYSE: AMD), has perked its head up during certain processor generations, but has never been able to consistently cut into Intel’s dominant moat. AMD stock remains much more of a speculative timing play, whereas Intel has value as a solid, core holding.
Intel continues to innovate and the success of their recent Sandy Bridge chip, which combines both the computer and graphics processors on the same silicon, lays the ground for further growth. Despite this, the stock is not highly loved by Wall Street. It is covered by nearly the entire sell-side with over 50 recommendations, but the HOLD and SELL ratings outnumber the BUY ratings. Much of this skepticism stems from the maturation of the PC market, Intel’s dominant home court. The transition of computing to peripheral devices such as smartphones and tablets moves Intel off of its home turf and onto that of ARM Holding PLC (NASDAQ: ARMH). ARM holds many intellectual property rights for microprocessors held in many of the mobile devices used today. While there may be some notable competition in this space, Intel has an expansive research budget and should easily be a significant player as time elapses. Not only that, but mobile usage directly increases “cloud” usage and the need for enterprise server processors- an Intel strong hold.
The outlook on Intel remains one of consistent, moderate growth. Combined with this outlook is a stock that exhibits many traits that are associated with market-beating returns. First, the price-to-earnings ratio of 11x is very undemanding. Earnings growth has been uneven, but the company has grown earnings-per-share at a 19% compound annual rate from fiscal year 2007 through fiscal year 2011. Don’t forget there was a little bit of an economic slowdown during this time interval! On top of that, Intel boasts a market-beating dividend yield of 3%. The company continues to return cash to shareholders and has increased the payout to the tune of 14% on average over the last five years.
These two points alone make the stock a high-quality candidate to an investor’s portfolio. I personally have a favorable view of the free cash flow yield, which is a ratio that highlights a company’s cash generating abilities relative to their total market capitalization. Intel’s FCF yield of 8% is above-average and reflects strong operating cash flow that consistently outpaces capital expenditures along with a net cash position on the balance sheet. This 8% ratio indicates a cheap stock that may exhibit multiple expansion on top of their earnings growth, although the exact timing of this is anyone’s guess. And lastly, the company has consistently generated returns on invested capital in the mid-teens. This exceeds the weighted average cost of capital and excess returns will accrue to shareholders over the long term.
Bottom Line
Intel has a long ways to go before it surpasses its June 30, 2000 high of $66.84, but it looks like it is positioned to finally break above $30. Investors shouldn’t be trapped into the bias of thinking that just because the stock has doubled off its recession low that they missed the boat. The key point is where the stock is now and where you think it will be in five years- or whatever timeframe is pertinent to your investing philosophy. I think if this $30 level is clearly taken out then this will slowly transition investors, analysts, and portfolio managers that have thought the stock was “stuck” forever and create a persistent uptick in demand for the shares. Investors would do wise to get in ahead of such a scenario.
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