Investors are betting that Federal Reserve chairman Ben Bernanke will sanction another round of quantitative easing if equities drop further. Assuming this is right, then it’s time to load up on technology titans such as Intel.
Intel is the world’s largest chip manufacturer, supplying 80% of all computers (64% of revenues) and servers (19%). The other 17% of sales is derived from security software (such as McAfee), IT services and hardware for mobile and other digital devices. All this gives it a commanding position at the nerve centre of the technology revolution. Indeed, upgrading to its productivity-enhancing products enables a firm’s staff to work smarter from cheaper locations (home) and also leverage economies of scale, speed up decision making, raise inventory turnover and launch new services. On many occasions the payback comes within months rather than years.
What’s more, the explosive take-up of high-definition video and web 2.0 services won’t grind to a halt anytime soon and will underpin demand for the latest hot gadgets that use its clever chips. Intel also continues to execute well on the data-centre side, with growth driven by the server market and the upgrade cycle.
Intel (Nasdaq: INTC), rated a BUY by Caris
The bears have been far too quick to write off Intel’s tablet and smart-phone credentials. True, it has ceded the initiative to rival ARM. But the war is not yet over. Intel snapped up Infineon’s wireless division for $1.4bn in January and is currently developing its next wave of low-voltage microprocessors. Its decision to launch a compelling ultra-thin notebook (called ultrabook), working with manufacturers such as ASUS, could prove a real hit in the years ahead.
Wall Street is forecasting 2011 turnover and underlying earnings per share (EPS) of $54bn and $2.37 respectively, rising to $57bn and $2.47 in 2012. Consequently the stock trades on an attractive 2011 price/earnings (p/e) ratio of less than nine and pays a 3% dividend yield. I value the group on an eight-times earnings before interest tax and amortisation (EBITA) multiple. After adjusting for the $5.5bn cash pile, that delivers an intrinsic worth of $27 a share.
There are risks to be aware of. Being the number-one player in its field means that Intel cannot entirely escape from the vagaries of the economic cycle, especially if smart phones and tablets continue to eat into its bread-and-butter PC market. Rivals are chasing hard too, and Hewlett-Packard’s exit from computer hardware may cause a temporary brake on demand.
That said, emerging markets, which represent more than 50% of sales, still have plenty of gas left in the tank. In fact, in July, chief executive Paul Otellini made bullish noises for the second half of 2011 based on shipments to Turkey and Indonesia rising 70% in the second quarter and strong Indian (17%) and Chinese volumes (14%). With corporations continuing to refresh their IT equipment, Intel looks a nice place to park funds in these volatile times. Third-quarter results are due out on 18 October, and Caris has a target price of $27.
Rating: BUY at $20 (market capitalisation $107bn)