This is Cray!

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

Best of Breed originated at breed shows or dog shows to award which dog deserves the title of being the best representative specimen of its breed.  When it comes to investing and keeping risks manageable, it would be wise to find which companies can be nominees for the award ‘best of breed’ in their sector.  Keep in mind that I stated companies and not stocks.  Obviously, many times you will find high stock performers based on speculation, or temporary pops from 52-week lows or all-time lows, or just stocks that are making a run after a quarter or two of solid numbers.  However, solid stocks usually trail solid companies.

Cray

A supercomputer is a computer at the front line of current processing capacity, particularly in speed of calculations and overall computing power.  What does this have to do with Cray Inc. (NASDAQ: CRAY)?  Well supercomputers were introduced in the 1960s and were designed primarily by Seymour Cray who started Cray Research in 1972.  Even though today’s company is mainly by name after being spun off, bankrupted, and bought out by Tera Computer Company in 2000, they are definitely a high-performance computing (HPC) company to watch in the near future after seeing their share price rise over 90% this year alone.

Cray’s recent success this year can be factored into total revenue increasing $88.7 million in the first six months of 2012 compared to the first six months of 2011, from $107.8 million to $196.5 million.  Product revenue caused this jump with an increase of $100.1 million.  Consequently, net income increased the first six months to $152.4 million compared to a $4.4 million loss in the same time frame a year ago.  Both revenue and net income increases were mainly a result of upgrades at Oak Ridge National Laboratory and a huge sale of their interconnect hardware development program to Intel on May 2, 2012 for $140 million.

I believe Cray has the potential to go much higher in the coming years.  Supercomputing is significantly more immune to the current computing trends of your typical individual consumer.  Whereas individuals are migrating to smaller and portable devices to use software, play games, and browse the internet while requiring less computing power advances, the opposite is true for the supercomputing industry.  Supercomputers are used for highly calculation-intensive tasks and generally more is better.  Quantum physics, weather forecasting, climate research, oil and gas exploration, molecular modeling, and other physical simulations have big consequences in the near future.  Being able to predict natural disasters, find more oil reserves, study and try to find cures for diseases like cancer, and exploring the universe aren’t exactly things you can do with an iPad.

Recently institutions have started to believe in Cray also with net purchases last quarter of 2.4 million shares.  The last four quarters, Cray has been shocking analyst estimates with surprises to the upside on earnings-per-share (EPS) with 27.1% (September 2011), 286.4% (December 2011), 333.3% (March 2012), and 2692.9% (June 2012). 

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CRAY Total Return Price data by YCharts

Intel

Recently, there has been increasing talk about how recent mobile computing trends have hurt Intel (NASDAQ: INTC) and their PC processor business.  However, their desktop and notebook product business was down only about 1% the first six months this year compared to last year.  Additionally, Intel’s revenue growth is still on the plus side with a 3.6% and their profit margins are well within the healthy range with gross and total profit margins of 63%+ and 20%+, respectively.  Furthermore, in the last 20 quarters, Intel has only produced a negative EPS once in the June 2009 quarter and that was only a loss of $0.07.

The future of Intel in my opinion is very intact.  Who can do what Intel does better than Intel?  Their long-time rival Advanced Micro Devices (NYSE: AMD) has seen its share price decline over 75% the past five years and it continues to struggle in today’s computing market focused on mobile technology.  Intel’s Sandy Bridge chip designs have pushed its market share in global processing to over 80% while AMD’s market share dropped to over 10% the past year.

Overall, Intel is not going anywhere.  Yes, people are gradually shifting their computing time to their smart phones or tablets.  However, people still do real work on actual computers – whether that is a desktop or laptop.  Businesses don’t give their employees smart phones and ask them to model an engineering drawing or create a huge spreadsheet on their tablets.  Intel’s share price has dropped nearly 20% the past six months, but I only see this as an opportunity to either enter or buy more shares – especially with a dividend approaching 4% with today’s share price.  Microsoft’s Windows 8 should help boost Intel in the coming year and now is as good a time as any to at least give Intel a look.

Intel’s next earning announcement is October 16, 2012.

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INTC Total Return Price data by YCharts

ARM Holdings

If supercomputers and your typical desktop and laptops are too big to think about or invest in, perhaps ARM Holdings (NASDAQ: ARMH) is more of your style in today’s mobile world.  ARM has seen its share price increase over 200% the past 5 years and with good reason.  They are seen as the market leader in the field of mobile phone chips with nearly all modern mobile phones and PDAs containing ARM CPUs due to their low electric power consumption.  ARM processors are the main workhorse components in CPUs for Apple, HTC, Nokia, Sony Ericsson, and Samsung phones.  Even the new iPhone 5 by Apple has dual ARM cores inside the chip.  Imagine all the iPhone 5’s that are sold now and will be sold in the coming year.  Now imagine how much in profits that could mean for ARM.

Today over 95% of the smart phone market contains ARM technology.  In the past 5 years, ARM has seen its EPS increase from the $0.03-0.04 range in 2007 to $0.13 as of June 2012.  In the past 3 years alone, net income to common shares has nearly tripled from $65.3 million for the year 2009 to $175.1 million for the year 2011.  I personally believe ARM is going to hit the $200 million mark for 2012.

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ARMH Total Return Price data by YCharts

Interested in Additional Analysis?

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mikecart1 owns shares of Intel. 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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