Dear Intel, Where Are You Heading?

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

Intel (NASDAQ: INTC) reported its Q4 and FY 2012 results on Jan. 17. The market was not too thrilled about this report and the stock has been hammered, down nearly 7% the following trading day. In fact, the market hasn't been thrilled about anything that has the words 'Intel' on it: The stock has been a laggard in 2012, dropping from a high of $29 to a floor price of $19, a drop of nearly 35%. It is now resting slighly above $21. The question now arises, is Intel worth a buy at today's share price- or will Intel be a laggard again in 2013?

The trend is not its friend

Intel reported full-year revenue of $53.3 billion, operating income of $14.6 billion, net income of $11.0 billion and EPS of $2.13. The company generated approximately $18.9 billion in cash from operations, paid dividends of $4.4 billion, and used $4.8 billion to repurchase 191 million shares of stock.

Now, these numbers do seem impressive but when you begin dissecting them, you will quickly find that the business is being squeezed all across the board. In specific, revenue of $53.3 billion was down 1%, from $54 billion. Operating income of $14.6 billion was down 16% from $17.5 billion. These numbers resulted in a 15% decline in net income. And finally, earnings per share stood at $2.13, a decline of 11% from $2.39 in the previous year.

When asked about the company's sub-performance in 2012, the CFO blamed slower than expected GDP growth, declining PC growth, and the rise of the tablet for the slowdown in revenue for 2012. 

It's all about expectations

This sharp decline in Intel's share price is mostly associated with several factors, including: weak Q1 2013 guidance, higher than expected 2013 capex spending, and doubts about its FY 2013 revenue guidance. But when analyzing the case in hand, it is imperative to try and figure out the worst case scenario, and then - invest accordingly. I believe that Intel is a buy for the following reasons: 

It is cheap 

At the conference, Intel provided a revenue guidance for 2013 of a low single-digit percentage increase and a 60% gross margin. Even if we plan for an especially rainy day (or year) with a negative growth of 10% (very unlikely) and a 50% gross margin, we will still be looking at an annual EPS of $1.60. This ominous scenario gives Intel an earnings multiple of 13x, which is still way below the average current multiple of 16x. In this regard, Intel's current multiple of 10x is ridiculously cheap, especially when considering that it controls 80% of the market share for chips. 

Its closest competitors, Qualcomm (NASDAQ: QCOM) and ARM Holdings (NASDAQ: ARMH) are trading at P/E multiples of 18x and 47x, respectively. Not cheap, to say the least. Another competitor, Advanced Micro Devices (NYSE: AMD) simply has no P/E because it hasn't been able to show a profit in the recent quarters.  

Buy back program

Intel employs a share buyback program. Even if Intel gives you no growth, it will still give you share buybacks. Intel is currently buying back a billion dollars a quarter in its own shares, roughly the same as Microsoft (NASDAQ: MSFT). But Intel's market cap is just $107 billion, and Microsoft's is $228 billion. That is a big difference in favor of Intel.

Dividends

It pays dividends through the roof. At a 4.2% dividend yield, the company is amongst the highest dividend yielders in the Dow Jones Index. It has a long history of paying uninterrupted dividend paychecks and upping them year over year.

To put simply, Intel now operates in a tough industry, under very tough market conditions. The market for PCs is slowing, and with it- the demand for Intel's products. But Intel is the dominant star of this weak industry. Once the industry turns around the corner, Intel will be there to take advantage of this turn of events.

Putting it all together

Intel has no doubt disappointed many investors in 2012. But precisely because of this fact, the company is now extremely cheap, pays a hefty dividend and is committed to an aggressive share buyback program. I believe that investors at these prices will be rewarded handsomely.

 


shmulikarpf owns shares of MSFT and INTC. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, Microsoft, and Qualcomm. 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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