Intel: A Compelling Value Play

Erick 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) is in a tough position right now. It's core market PCs is slowly shrinking, while smartphones and tablets are growing by leaps and bounds. What is a former juggernaut to do? Retire in a quiet nursing home or elbow into the party?

According to Yahoo! Finance, INTC closed Friday at $22.66 with a Price to Earnings Ratio of 9.62 and a very juicy dividend yield of 4% (compare that to the yield on a 10 year U.S. Treasury). Intel's main competitor is AMD (NYSE: AMD), a company with a loss over the last twelve months.  AMD has been increasingly getting the very low end and least profitable part of the PC market while Intel has been increasing their sales of high-end servers and high-end PCs such as Apple's (NASDAQ: AAPL) beauties that have have been growing in the midst of this stagnant market.

Intel's stock price suffered this last few weeks after they warned of upcoming disappointing revenues. Intel expects $13.2 billion versus previous estimates ranging from $13.8 billion to $14.8 billion. Is that enough to justify a 10% slide in the stock price between September 6 and Friday. I'll let you be the judge of that, but with a very attractive valuation and a very healthy balance sheet (cash in hand over $13 billion and debt just over $7 billion), good cash flow and a very sustainable dividend payout ratio of about 36%, I am convinced that in 5 years INTC will have doubled in price at the very least. In the short term, there is going to be pain, but Intel is not being static. The company is developing smartphone chips that compete with the likes of Qualcomm and ARM Holdings (NASDAQ: ARMH).

I am putting my money on Intel because they have the R&D and facilities to compete in the space and the heft to produce large quantities of chips. Apple's A6 is a custom design on an ARM core, but there is no reason that Apple can't move to Intel's chips in the future, especially as iOs 6 and Mountain Lion come closer together.

As more companies move to the cloud, the need for servers with Intel chips will climb. Ivy Bridge is being contemplated for Microsoft's Windows 8 surface tablet (the high-end model only for now, the low-end being served by ARM). 

All of these changes bode well for Intel, and I can wait patiently collecting that juicy ever increasing dividend until Mr. Market comes to see things my way. The higher the market goes the more I look to solid companies with good dividends and Intel gives me the rare opportunity to invest in a company in transition. Short term the prospects may seem bleak, but in the longer term I see a lot to smile about.

Dig Deeper

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Fool blogger Erick M. Santos, M.D., Ph.D. currently owns shares in INTC, AAPL, QCOM and ARMH. He owns no position and is staying well clear of AMD. The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services recommend Apple and 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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