My two teenage daughters are badgering me to buy them new computers. But I am deliberately holding off until the launch of Microsoft’s Windows 8 operating system on 25 October. I am not alone – millions of other people seem to be doing the same thing. That’s not great news for the PC market, as sales have stalled ahead of the launch.
One high-profile casualty has been Intel, the $110bn tech giant that is the brains behind 80% of all computer chips. It was forced to trim its revenue target for the next quarter by 7% to between $12.9bn and $13.5bn. That has dragged the stock price down into deep-value territory; it now offers a 3.5% dividend yield and trades on a price/earnings (p/e) ratio of just 10.5. Here’s why I think it’s now a buy.
Firstly, before the end of the year there should be a powerful rebound in PC orders as consumers replace older machines with much slicker, lightweight ultrabooks – especially as Christmas approaches. Apple has already led the way here – iPhone volumes fell immediately prior to the release of its fifth-generation device, but then shot up again.
Meanwhile, other parts of Intel’s business are holding up well – chips for servers, McAfee anti-virus software and IT services are all going strong. I also think the sceptics have been far too quick to write off the group’s fledgling tablet and smart-phone expertise.
True, it has ceded the initiative here to rival ARM. But in response Intel snapped up Infineon’s wireless division for $1.4bn in 2011 and has just signed a potentially game-changing deal with Google to supply chips for its Motorola handsets. Google has stated that Android devices will support Intel’s x-86 architecture and be optimised for its chips.
So I have no doubts about Intel’s product portfolio, which keeps it at the heart of the tech revolution. By upgrading to its productivity-enhancing chips, corporations can enable staff to work from home, speed-up decision making and even offer new services. In many cases the payback is in months rather than years.
Intel Corp (Nasdaq: INTC), rated OUTPERFORM by Robert Baird
Wall Street is forecasting 2012 turnover and underlying earnings per share (EPS) of $53.5bn and $2.14 respectively, climbing to $55.7bn and $2.20 in 2013. So I would value the stock on a ten-times earnings before interest, tax and amortisation (EBITA) multiple. Adjusted for the $2.8bn cash pile, that delivers an intrinsic worth of $31 per share.
There are a few pitfalls to watch. Being number one in its field means Intel can’t entirely escape the vagaries of the economic cycle, especially if smartphones continue to eat into its bread-and-butter PC market. Rivals are also chasing hard, and for British investors there’s foreign-currency risk to consider.
Nonetheless, the popularity of high-definition video and web 2.0 services won’t diminish anytime soon, and there’s also plenty of growth left in the server (data centre) market. Third-quarter results are due out on 16 October, while Robert Baird has a target price of $32.
Rating: BUY at $22.50
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more.