3 Reasons to Own This Tech Stock
Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the U.S. economy recovers from the worst recession in decades, cyclical sectors of the market are looking attractive. These industries are comprised of businesses closely tied to the swings of the economy, whose products are bought more or less frequently depending on broader economic conditions.
One cyclical sector is technology, which corporate and individual customers should spend more money on in an improving economy. However, industry giant Intel (NASDAQ: INTC) has seen its stock price languish over the past year amid disappointing sales and profits in recent quarters.
At the same time, Foolish investors understand the long-term opportunities that arise from buying when there’s blood in the streets. To that end, here are three reasons Intel remains a steal at its current price.
Reason #1: It’s really cheap
Many technology stocks, including Intel, trade at a significant discount to the broader market. The S&P 500 Index trades for about 15 times its estimated 2013 earnings. Several large-cap technology stocks, meanwhile, trade for much lower multiples. Industry giants Microsoft (NASDAQ: MSFT) and Cisco Systems (NASDAQ: CSCO), and Intel exchange for just 11 times forward earnings.
Of course, cheap stocks are usually cheap for a reason. Cisco is in the middle of a turnaround. The company is undergoing a number of changes, including ditching non-performing products, after years of disappointing financial results.
It seems as though the company is getting itself back on the right track. Cisco’s quarterly net sales increased 5% year over year and GAAP earnings per share increased an impressive 15% versus the same period in 2012.
Microsoft and Intel, meanwhile, trade for 11 times forward earnings, much lower than where the broader market trades. Moreover, since technology firms typically churn out lots of cash with little debt on the books, Intel looks even cheaper on a trailing basis.
Intel’s enterprise value to EBITDA multiple is just 5.5 times.
Both Microsoft and Intel suffer from the same pervasive fear that the personal computer is dead. However, Intel has made meaningful strides in this area, which brings us to reason number two.
Reason #2: It’s no longer chained to the PC
For Intel, the fear that the chip giant missed the mobile boat has served as an anchor on the stock. It’s true that Intel has turned in poor performance in recent periods. The company’s most recent quarterly revenue and earnings fell 2.5% and 25%, respectively, versus the prior year’s results.
For Microsoft’s part, despite the criticism, the company is still immensely profitable and is a cash cow. Even in a difficult environment for PCs, Microsoft booked more than $20 billion in revenue and $6 billion in net income during its most recent fiscal quarter.
In addition, Microsoft has a fortress balance sheet. The company is one of only four to hold a triple-A credit rating from Standard and Poor’s. At the end of its most recent quarter, Microsoft held nearly $75 billion in cash, equivalents, and short-term investments.
Whether the personal computer is akin to buggy whip technology remains to be seen. But Intel investors should take comfort in the fact that at long last, Intel appears to be gaining traction in getting its chips in mobile devices.
First, at a technology conference in Taiwan earlier this year, Samsung Electronics revealed that it will use Intel processors to power a new version of one of its main Android tablets. In total, Intel officers said they expect more than 30 tablets to use the company’s processors next year.
Then, on June 28, Intel executives said the company plans to speed up development and rollout of its Atom chips for use in mobile devices.
Should the company make meaningful strides in finally penetrating the mobile device market, the stock could easily attain a valuation multiple closer to that of the broader market.
Reason #3: A nearly 4% yield and an imminent dividend increase
While a languishing stock price is hard to swallow for any investor, the burden is eased when an investor receives hefty dividend payments to wait for the turnaround. In fact, long-term investors understand the value of reinvesting dividends at low prices. That’s why Intel’s 3.75% dividend yield is so valuable when the stock is in a downtrend.
Moreover, that dividend is likely to get even bigger soon. Intel’s dividend has remained unchanged for four quarters in a row, meaning the company is due for an increase. Intel has aggressively raised its dividend in recent years and has the financial flexibility to do so again, so there’s no reason to think the company won’t give shareholders a pay bump in time for its next payout.
Since Intel generates so much free cash with almost no debt on the books, a 10% dividend increase (or more) isn't out of the question.
The Foolish takeaway
Cisco, Microsoft, and Intel are each highly profitable businesses with billions in net cash on the books and competitive dividend yields. Moreover, each of these three stocks trades for a meaningful discount to the broader market.
Intel in particular has the highest dividend yield of the three and is more attractively valued than Cisco. At the same time, while Microsoft and Intel are both tied to the health of the personal computer, Intel is making more meaningful strides than Microsoft in expanding its business to carve out a piece of the mobile market pie. As a result, Intel is one of the best stocks to buy among large-cap technology and is a great value at current prices.
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Robert Ciura owns shares of Intel. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool owns shares of Intel and Microsoft. 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!