Intel Stock: Uncertainties Make This a “Hold”

Think twice about grabbing this legendary tech stock.
Once upon a time, Intel (NYSE: INTC), the giant computer microprocessor and chipset maker, was one of the hottest growth stocks in the world. From the year it went public in 1979 to 2000, the stock split 13 times.
And just from January 1, 1990 through August 31, 2000 – the day it hit its split-adjusted high of $56.29 – the stock threw off a cumulative total return of 6,673%, a sizzling 48.4% per year. In March 2000, before its stock started its downward march, the stock’s PE was 59.
Now, INTC is something else. It’s transitioning to a “stalwart stock,” with a trailing PE that’s well below its industry average (18.2 versus 26.2), and a stock that has had trouble keeping up with the performance of the benchmark S&P 500.
Lately, though, Intel stock has hit a hot streak: the stock shot up nearly 14 points over the last 24 months to $34.75, where it closed today – a jump of 70%, compared to the S&P’s rise of 40%.  What’s behind those numbers tells why I recommend that you continue to hold Intel stock, but avoid buying it if you don’t.
Intel’s slide was the result of a massive change in the market for computing devices from desktops and laptops – where INTC continues to enjoy a dominating market share of 80 percent – to “mobile devices” like tablets and smart phones.  In that burgeoning market, Intel has minuscule and shrinking presence, although it is trying valiantly to create one with legs.
As a result, Intel’s revenues shrank in the last two calendar years, from $54 billion in 2012 to $52.7 billion last year.  Earnings fell more steeply – 21% over the last two years – from $2.39 per share to $1.89.  The decline came not only from diminished sales but also from losses thrown off by its Mobile Center Group, its entry into the mobile microprocessor market.
Intel’s recent comeback has been driven by improving prospects in the PC and server markets, the latter where Intel commands a 90% share.  Prospects have changed for several reasons:  the continued demand from businesses for more powerful server processors to support the growth in cloud computing, networking, enterprise and high-performance computing; and Microsoft’s discontinuance of support for its 12-year-old Windows XP operating software, which is spurring consumer investment in new PCs with more robust processing power.
These factors contributed to Intel’s two successive quarterly earnings surprises this year, leading to higher guidance and better forecast long-term growth among Wall Street analysts.
In the first quarter, Intel beat the Street’s consensus estimate of earnings by a penny, but clobbered it in Q2, when it announced second quarter earnings of $4.10 a share, compared to Street’s $3.05.  Q3 was more in line, reporting 66 cents vs. 65 cent estimates.
The question, though, is whether these improvements are an indication of a new uptrend for Intel, or will prove to be a blip.  Not all analysts are convinced. In addition, Intel’s competitors have been closing the gap on its long-standing manufacturing prowess, coming out closer and closer with chips that rival Intel’s achievements in making more powerful microprocessors that use less energy.
Also in question is whether the company can finally break profitably into the mobile chip market, where it is a latecomer.
On the plus side – and the reason for my “hold” recommendation – is that even with that modest projected growth rate, investors can reasonably expect respectable future total returns of more than 10% a year.
The company continues to buy back shares aggressively and has raised dividends by an average of 17.7% a year to 90 cents (yield: 2.8%). It generates tons of cash, and has billions of cash on hand.
So why aren’t I buying Intel stock?  Because of a key value metric I focus on: the forward PE divided by the consensus 5-year Earnings Growth Rate plus dividend yield, or dividend-adjusted PEG.  INTC’s scores out at 1.35, the very upper limit of my standard for a “hold” call; to be a “buy,” the div-adjusted PEG has to be below 1.0.
INTC’s number means you’re paying too much for the underlying growth rate, and so have a greater risk of the price falling.  Still, we’re not far.  I’d buy in the high 20’s if the market correction we’ve seen continues.
Lawrence Meyers does not own shares of INTC.

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