Intel Earnings: Hit Or Miss, It's A Buy

Jan.15.14 | About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) releases its fourth-quarter earnings on Thursday and judging by Tuesday's price action - INTC stock finished up nearly 4% on the day - investors are optimistic. In fact, since September, Intel shares are up about 20%, far outpacing the S&P 500.

The consensus analyst forecast is for Intel earnings to come in at 52 cents per share, though Intel has been full of surprises of late. Last quarter, Intel earnings beat estimates by a whopping 9%.

Interestingly, while analysts have been raising their estimates for fourth quarter 2013 (see table), in the past 30 days, 11 of 39 analysts have lowered their forecasts for Q1 2014, and 14 out of 45 have lowered their forecast for full-year 2014. The consensus rating is "hold," which is code for "sell" in analyst-speak.

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Now, I don't pretend to have inside information here, but the consensus seems awfully bearish, particularly given that Intel's problems are nothing new. Intel depends heavily on PC sales to generate demand for its processors, and PC sales have been in decline for seven consecutive quarters.

One major factor is the decline in PC sales is long-term in nature and won't be changing any time soon: the emergence of smartphones and tablet as a viable alternative for basic computing tasks. But there are also shorter-term factors at work, such as a weak global economy with high unemployment and a general revolt against Microsoft's (NASDAQ:MSFT) Windows 8 by both consumers and businesses.

Well, improvement on the employment front is happening sporadically, as last month's job report showed only 74,000 jobs being created in December. But with the new-and-improved Windows 8.1 rounding off some of the more unpleasant edges of Windows 8, I expect to see resistance from both consumers and corporate IT departments slowly melt away.

And naturally, PC chips are not Intel's only line of business. A little more than 20% of Intel's revenues come from its server business, and this has been a great source of growth in recent years. The Data Center Group enjoyed 12% revenue growth last quarter, and I expect to see robust growth here for the foreseeable future. The rise of cloud computing has created new demand for server chips, and this is not a trend I see reversing.

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Based on everything I've said so far, INTC stock would be worth buying at current prices. It trades for 14 times expected earnings and yields 3.5% in dividends, making it attractive as a bond substitute if nothing else. And unlike bond coupon payments, Intel's dividend has a very high probability of rising in the years ahead.

But what if Intel actually turned out to be more than a slow-growth legacy tech company? What if - just maybe - it found a new source of revenue and INTC stock became a growth story again?

Well, as it would turn out, I think that is highly likely. I recently wrote that Intel's aggressive move into the "Internet of things" could make Intel the next Apple (NASDAQ:AAPL). I realize that this is a controversial statement, but remember that in 2000, Apple was an also-ran in the PC wars before the iPod transformed the company into the world's premier gadget company. And as the concept of the "smarthouse" gains steam, you're going to see Intel chips in everything from your refrigerator to your baby's pajamas.

I expect that Intel earnings will come in at least as good as the consensus estimates this quarter. But hit or miss, I consider INTC stock to be an attractive buy.

As of this writing, I was long INTC and MSFT.