Intel Corporation (INTC) and Microsoft Corporation (MSFT) are two underdogs in the mobile and wireless market at this moment. However, it may be a good thing for investors to evaluate both undervalued stocks now as too much optimism may already be baked in for the market while it trades at a level near multi-year highs. INTC and MSFT, both with strong cash flow and trading at low Forward P/E, will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
INTC was down 0.54% and closed at $21.26 on March 18, 2013. INTC had been trading in the range of $19.23-$29.27 in the past 52 weeks. INTC has a market cap of $105.15B with a beta of 1.00.
INTC was last upgraded by Drexel Hamilton from sell to hold with a price target of $22.00 (from $18.00) on February 26, 2013. Analysts currently have a mean target price of $22.96 and a median target price of $23.00 for INTC, suggesting 8%-8.18% upside potential. Analysts are estimating an EPS of $0.42 with revenue of $12.69B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $1.93 with revenue of $53.97B, which is 1.20% higher than 2012.
Intel continues to expand on the enterprise platforms and services end by rolling out the Intel Storage System (JBOD2000) to meet the need for expandable storage in the enterprise and data centers, which delivers up to 12 terabytes of storage capacity while working seamlessly with Intel Server Systems and Intel RAID. Intel's McAfee security division is also expected to benefit as cyber security comes into focus on the national front.
Fundamentally, there are a few positive factors for INTC:
- Higher revenue growth (3-year average) of 14.9 (vs. the industry average of 11.9)
- Higher operating margin of 27.4% and net margin of 20.6% (vs. the industry averages of 22.7% and 17.1%)
- Stronger ROE of 22.7 (vs. the average of 20.2)
- Lower P/E, P/B, and P/S of 10.0, 2.1, and 2.1 (vs. the industry averages of 24.0, 2.6, and 2.4)
- Lower Forward P/E of 9.6 (vs. the S&P 500's average of 13.9)
- INTC has a total cash of $18.20B with a total debt of $13.57B
- INTC generates a strong operating cash flow of $18.88B with a levered free cash flow of $4.48B
- INTC has 5 year average dividend yield of 3.50% and offers a forward annual dividend yield of 4.20%
Technically, the MACD (12, 26, 9) indicator is showing a slightly bullish trend, but the MACD difference had been declining since early March. The momentum indicator, RSI (14), is decreasing and is currently neutral at 50.09. INTC is trading below its 200-day MA of $22.56 and is approaching its 50-day MA support at $21.26, as seen from the chart below.
How to Invest
With a solid balance sheet, strong cash flow, and steady EPS growth, INTC is one of the most solid technology holdings for income investors at current valuation. In the near-term, if INTC cannot hold above its 50-day MA support, a safer entry point will be around $20-$20.5 range. For options traders/investors, credit put spread and covered call strategies can be leveraged to enhance the income while reducing the volatility. Investors can also review the following ETFs to gain exposure to INTC:
- Market Vectors Semiconductor ETF (SMH), 18.76% weighting
- Dow Jones U.S. Technology Index Fund (IYW), 4.54% weighting
- QQQ (QQQ), 3.64% weighting
- Technology Select Sector SPDR (XLK), 3.12% weighting
MSFT was up 0.23% and closed at $28.10 on March 18, 2013. MSFT had been trading in the range of $26.26-$32.95 in the past 52 weeks. MSFT has a market cap of $235.37B with a beta of 0.93.
On March 11, 2013, MKM Partners reiterated neutral rating and reduced the target price from $28 to $27 for MSFT. Analysts currently have a mean target price of $32.91 and a median target price of $33.00 for MSFT, suggesting 17.12%-17.44% upside potential. Analysts, on average, are estimating an EPS of $0.77 with revenue of $20.75B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.85 with revenue of $79.55B, which is 7.90% higher than 2012.
On March 11, 2013, MSFT declared a quarterly dividend of $0.23 per share. The dividend is payable June 13, 2013 to shareholders of record on May 16, 2013, and the ex-dividend date will be May 14, 2013.
The roll-out of Surface will continue, bringing Surface RT with Windows RT to Japan, Mexico, New Zealand, Russia, Singapore and Taiwan and Surface Pro with Windows 8 Pro to Australia, China, France, Germany, Hong Kong, New Zealand and the United Kingdom in the coming months, starting in late March. Surface is an extension of the Windows experience, while Surface RT provides some laptop capabilities and integrates productivity and mobility into one single product.
According to Bloomberg's report, "Microsoft has sold little more than a million of the Surface RT version and about 400,000 Surface Pros since their debuts, according to three people, who asked not to be named because sales haven't yet been made public." Surface and Surface Pro are Microsoft's first direct attempt to grab a slice of the surging market for tablets and to prove that Windows has a place in a world of touch screens and smartphone applications; however, that hasn't happened so far as said by Alex Gauna, an analyst at JMP Securities LLC. Brendan Barnicle, an analyst at Pacific Crest Securities, reduced revenue estimates for Microsoft's current quarter, citing weak Surface demand and projects the sales of 600,000 tablets in the period, down from an earlier prediction of 1.4 million. Surface products remain as one of the factors for MSFT's underperformance in the past 6 months, where MSFT was down 9.85% and the Nasdaq was up 3.83%.
Despite the weakness from Surface, there are a few positive factors for MSFT, fundamentally:
- Lower debt/equity of 0.2 (vs. the industry average of 0.3)
- Lower P/E, P/B, and P/S of 15.4, 3.2 and 3.3 (vs. the industry averages of 26.4, 3.6, and 3.8)
- Lower Forward P/E of 8.8 (vs. the S&P 500's average of 13.9)
- MSFT has a total cash of $68.10B with a total debt of $14.22B
- MSFT generates a strong operating cash flow of $30.54B with a levered free cash flow of $23.99B
- MSFT currently offers an annual dividend yield of 3.27%
Technically, the MACD (12, 26, 9) indicator is nearly neutral, and the RSI (14) is indicating a slightly bullish lean at 56.87. MSFT had been trading between its 200-day MA of $28.39 and 50-day MA of $ 27.47 since mid-January, as seen from the chart below.
How to Invest
MSFT's share price is under stress because of the weak sales forecast for Surface products and the secular decline of PC sales. However, with forward P/E of 8.8 and annual dividend yield of 3.27%, there are more upside potential than downside risk for MSFT with its strong cash generation ability and a hefty cash reserve. MSFT is not suitable for investors seeking high growth in the near-term, but is a strong investment target for income seekers. Similar to INTC, credit put spread and covered call strategies can be leveraged to enhance the income while reducing the volatility for options traders/investors. A safer entry point will be around $27-$27.2 price range. Investors can also review the following ETFs to gain exposure to MSFT:
- Dow Jones U.S. Technology Index Fund , 8.64% weighting
- QQQ , 8.04% weighting
- Technology Select Sector SPDR , 7.34% weighting
Note: All prices are quoted from the closing of March 18, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Additional disclosure: May initiate a long position in MSFT