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Executive Summary

Intel (INTC) has done a great job of managing its way through the PC paradigm shift. I'm impressed with the way the company was able to absorb the losses. Intel anticipated the slowdown and had already begun a process of diversifying into different product and service revenue streams. The major hit from the secular decline of the traditional PC came in 2012. Intel is still being dragged down by the decline in PC sales though. Nevertheless, this year it was offset by growth in areas such as data center, software and mobile devices. Success in tablets and smartphones will be crucial to Intel's success. I believe it has the right stuff to make it happen. Intel's recent launch of its new Core chips, code-named Haswell, and its Atom system on a chip (SoC) meaningfully advances its competitiveness regarding mobile devices. Intel has significantly underperformed in this area in the past. I believe Intel has substantial upside from here. In the following sections I will perform an analysis of the stock and lay out my bull case.

Recent Earnings Report Quick Recap

On 7/17/2013, Intel reported second quarter 2013 earnings of $0.39 per share. This result was inline with the consensus of the 41 analysts following the company and missed last year's second quarter results by 27.78%. The next earnings announcement is expected on 10/15/2013.

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Market Comparison

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Intel looks solid in comparison to the industry, sector and the S&P 500. The discount in Intel related to the P/E ratio comparisons is telling. The stock is trading for a 40% discount to the S&P 500. The issue is Intel's EPS growth rate is expected to be nearly 10% lower next year. One major positive is the PEG Ratio. Intel's is 1.5. This is significantly less than the PEG ratio of stocks in the S&P 500 and technology sector.

Fundamental Peer Comparison

Please review the following analysis of key fundamentals regarding Intel vs. its peers and industry averages. The tables were provided by Scottrade.

Profitability

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Intel is on par with the industry and its peers with regard to profitability. With gross margins better than the industry average yet less than its peers, Intel looks OK here. When it comes to net profit margins Intel is doing considerably better than the industry average and slightly less than its peers. The upcoming shift in product mix could be a significant catalyst for margin expansion.

Valuation

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Intel looks great when it comes to valuation. The P/E comparisons have Intel trading substantially lower than its peers and the industry average. Intel's P/E ratio being below the industry average signals that investors are not willing to pay a premium for this stock, so, if you're looking for value, Intel is the stock for you. Intel is trading for 6.4 times free cash flow. The company is a massive cash cow. Efficient and effective use of this cash flow is one of the keys to success for Intel.

Growth

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EPS and sales growth are the company's main points of concern. Sales growth over the past five years is lacking. Furthermore, during the past year, earnings growth has lagged its historical five-year growth rate. This is part of the reason the company is shifting its priorities. The company has done a good job of growing the dividend.

Financial Strength

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As you can see, Intel is not highly leveraged. Intel has plenty of liquidity and cash reserves. The issue for Intel is how to use the cash wisely and stay on a path to increased profits. Finally, a 35% payout ratio regarding the current dividend is for the most part in line with peers and the industry average. Intel has been steadily buying back shares on plan as well.

Management Effectiveness

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Management's effective use of company profits and assets is probably the most important data to analyze when deciding to invest in a company. Intel's management is doing a good job regarding ROA, ROE and ROI, but there is always room for improvement. The company is currently performing in line with its peers and the industry average.

Positive Catalysts

Expanding Profit Margins

Profit margins should begin to widen in 2014 for several reasons. The impact on margins from the slowing PC business should steadily diminish with time. The ramp up and introduction of new technologies should have a noteworthy positive effect on margins as well. Nevertheless, there will always be pricing pressure due to product mix and competition.

Growth Focus

Intel's ability to execute its growth strategy related to new products and the foundry business are a big part of my bullish thesis for the company. The shift in focus from areas of decline to areas of growth is key to the company's success. Intel has great foresight. I believe it will be successful in transitioning into the mobile space and other areas of opportunity as well.

Financial Strength

Intel's strong financial position allows the company to make moves which lead to opportunity for greater profits. Intel's prudent management of expenses and generation of growing cash flows have enabled the company to increase dividends and repurchase shares.

Downside Risks

Slowing Growth

Slowing growth in emerging markets may cause an inventory correction. Managing inventory and overhead costs related to slowing business lines is very important to Intel's bottom line.

Price Erosion

The risk of major price erosion due to product mix and increased competition from AMD (AMD) could derail Intel's plans. This is a highly competitive market. Intel's product must continue to be best in class for the company to perform.

Lack of Traction in Mobile

The fact that Intel is so formidable regarding to size and strength is both good and bad. With a company of this size, the constant redeployment of personnel and assets can become a money drain if not managed closely. Intel will need to stay on track regarding the focus on mobile to be successful.

Macro Market Exposure

The month of August has been one of highs and lows. It seems the summer doldrums may finally be taking effect as the performance of the major averages have turned south. The market looks frothy to me. The latest Bull Run looks extremely long in the tooth at over four years. A rising tide lifts all boats, but it can sink them just as easily. Stocks tend to take the stairs up and the elevator down. With the recent geopolitical tensions over Syria rising, it would be prudent to proceed with caution.

Conclusion

Intel may have some more downside near-term given the recent softness in global markets and news regarding Syria. Nevertheless, I posit this sell off is a buying opportunity for potential shareholders. There are two major factors behind my bullishness on Intel. I believe Intel's management is shrewd and knows what they are doing. Intel has prepared accordingly for the next evolution in mobile computing. Starting in 2014 we should finally see some major progress on the bottom line. Just as the new products begin to gain traction the downside from the PC segment will start to wane. I like the future prospects for Intel. Moreover, at this point none of this upside is processed into the stock. I don't see the company doubling anytime soon, nonetheless, by the end of 2014 i expect to see Intel trading in the mid thirties. I plan to layer into a position over time to reduce risk. I think the macro market selloff isn't over just yet and Intel's stock will not be immune to a selloff based on geopolitical risk.

Source: Intel Unhinged: Has The Elusive Double Finally Arrived?

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article is for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.