Why We Think Intel Will Trade North Of $30 Before Year's End

Apr.20.14 | About: Intel Corporation (INTC)


Intel is simply a cash-flow machine, and its annual dividend payout is not only safe on the basis of the Valuentum Dividend Cushion score but also is poised to grow.

A strong competitive position, an attractive valuation, and a safe and growing dividend are a few qualities that make Intel a Valuentum stock.

The company remains a holding in the actively-managed portfolios.

Frankly, it's hard not to like Intel (NASDAQ:INTC). The company dominates the microprocessor and chipset market, and while rivals can adapt quickly in the land of technology, continuous research and development keeps the firm a step ahead of the competition. If that weren't enough, the company is simply a cash-flow machine, and its annual dividend payout is not only safe on the basis of the Valuentum Dividend Cushion score but also is poised to grow into the future. A strong competitive position, an attractive valuation, and a safe and growing dividend are a few qualities that make the company a Valuentum stock. It is held in both the Best Ideas portfolio and Dividend Growth portfolio.

Intel's goal is to be the preeminent computing solutions company powering the worldwide digital economy, and it continues to take strides to achieve this end. The chip giant continues to transform its focus from making chips for PCs/servers to the delivery of solutions consisting of hardware and software platforms and supporting services across a plethora of devices. Intel has the following key objectives (source):

1) strive to ensure that Intel's technology is the best choice for any computing device, including PCs, data centers, cloud computing, ultra-mobile devices, and wearables;

2) be the platform of choice for any operating system;

3) maximize and extend its manufacturing technology leadership;

4) extend to adjacent services such as security, cloud, and foundry;

5) expand platforms into adjacent market segments to bring compelling new System-on-Chip (SoC) solutions and user experiences to ultra-mobile form factors including smartphones and tablets, as well as notebooks (including Ultrabook devices and 2 in 1 systems), embedded systems, and microserver applications;

6) develop platforms to enable devices that connect to the Internet of Things and to each other to create a computing continuum offering consumers a set of secure, consistent, engaging, and personalized forms of computing; and

7) strive to lower the footprint of its products and operations as well as be an asset to the communities we work in.

Intel reported first-quarter results Tuesday that revealed progress toward its goals. The company reported revenue of $12.8 billion (up 1% from a year ago), operating income of $2.5 billion (up 1% from a year ago), net income of $1.9 billion and earnings per share of $0.38. Intel's gross margin in the period was one point above its previous guidance as it benefited from lower factory startup costs on 14nm and other non-production cost of sales. The firm generated an impressive $3.5 billion in cash flow from operations, which is more than three times what it paid out as dividends during the period, indicating potential for future increases. Management's commentary was also quite encouraging:

In the first quarter we saw solid growth in the data center, signs of improvement in the PC business, and we shipped 5 million tablet processors, making strong progress on our goal of 40 million tablets for 2014. Additionally, we demonstrated our further commitment to grow in the enterprise with a strategic technology and business collaboration with Cloudera, we introduced our second-generation LTE platform with CAT6 and other advanced features, and we shipped our first Quark products for the Internet of Things.

Data Center Group revenue and Internet of Things Group revenue advanced 11% and 32%, respectively, on a year-over-year basis, though the company did face a significant decline in its Mobile and Communications Group. Qualcomm (NASDAQ:QCOM) remains a formidable foe in mobile, though we think Intel will make inroads over the long haul. In any case, Intel continues to transform its business, and news that the firm's PC Client Group revenue declined only 1% on a year-over-year basis in the quarter was quite encouraging. Last Wednesday, we picked up data from International Data Corp that pointed to positive news for the PC supply chain, and while we can't say that the better-than-feared PC Client Group performance was completely unexpected, we liked the news:

Though worldwide PC shipments continued to decline during the first quarter of 2014, the pace of the fall was nearly a percentage point better than expected (-4.4% versus -5.3% forecast, -5.6% in the fourth quarter, and -7.3% in the third quarter). Much of the upside surprise during the period came from mature commercial markets as technical support for Windows XP expired.

We think the continued stabilization of the PC market drove the penny of upside in Intel's first-quarter earnings (absent buybacks), and we think the stabilizing market is going a long way to supporting the firm's full-year 2014 forecasts. Intel reiterated its 2014 outlook for the top line, but the company increased its gross margin forecast for the year by a full percentage point, even as it raised its R&D plus MG&A guidance by a few hundred million dollars. We like the trajectory of both developments as it reveals a more resilient pricing environment coupled with lower start-up costs on 14nm and a focus by management to continue to invest in its product line-up. This long-term focus is invaluable to shareholders. The company ended the quarter with total cash investments of $19 billion.

Valuentum's Take

Eleven firms raised their price target on Intel following the news:

Topeka -- from $28 to $30, +7.1%, Maintains Buy

MKM -- from $26 to $27, +3.8%, Neutral

Susquehanna -- from $21 to $23, +9.5%, Neutral

Cowen -- from $23.50 to $24, +2.1%, Market Perform

FBR -- from $27 to $30, +11.1%, Outperform

Pacific Crest -- from $31 to $32, +3.2%, Outperform

Jefferies -- from $32 to $35, +9.3%, Buy

UBS -- from $24 to $28, +16.6%, Neutral

Roth -- from $25 to $28, +12%, Neutral

RBC -- from $26 to $28, +7.6%, Sector Perform

Goldman -- from $16 to $17, +6.2%, Sell

We're staying pat with our $30 per-share fair value estimate and expect Intel to continue to execute at a high level, while rewarding shareholders with a nice and growing dividend stream. Shares are trading just shy of $27 per share at the time of this writing. The PC market is improving, the company's gross margins are holding the line, and management is enthused about its "roadmap to profitability" and closing the gap with competition in its struggling mobile business. We think it's hard to argue that Intel doesn't have upside. The company remains a holding in the actively-managed portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.