10 Reasons Intel Is a Compelling Buy

| About: Intel Corporation (INTC)
Monday saw another modest rally that ended up being squandered away by the close. This has become a consistent trend over the last couple of weeks. You would think given we have fallen for six straight weeks, the market would be able to muster at least one short term oversold rally. However, that does not mean we cannot start to nibble in selected areas. One of the stocks that I like at these levels and am starting to acquire is Intel (NASDAQ:INTC) through a combination of purchases and slightly out of the money put options to generate premium and/or lower my average cost.
Intel Corporation engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds. The company also provides system on chip products that integrate its core processing functionalities with other system components, such as graphics, audio, and video, onto a single chip. In addition, it offers chipset products that send data between the microprocessor and input, display, and storage devices, including keyboard, mouse, monitor, hard drive, and CD, DVD, or Blu-ray drives; motherboards designed for desktop, server, and workstation platforms, and that has connectors for attaching devices to the bus; and wired and wireless connectivity products consisting of network adapters and embedded wireless cards used to translate and transmit data across networks.
Ten reasons to own Intel at around $21 a share:
  1. It is selling for around 9.5 times this year’s projected earnings and nine times 2012’s consensus EPS.
  2. It has handily beat earnings estimates over the last four quarters. Consensus estimates for both 2011 and 2012 have substantially been revised up over the last two months as well.
  3. It has grown earnings 14% average annually over the past five years, even given the recession. S&P predicts it will approximate this growth rate annually over the next three years.
  4. Intel has a great balance sheet with almost $2 a share in net cash. It yields 3.3% and has grown its dividend an average of 12.5% annually over the past five years. With a payout ratio of only around 30% based on this year’s earnings and increasing earnings and revenues, it has the means and flexibility to increase its dividend in the near and longer term.
  5. It is growing revenues by over 20% in 2011 and another 6% is predicted for 2012, which might turn out to be conservative given the growth it is getting in servers in data centers.
  6. Despite all this Intel is getting no respect in the market right now and is selling at the bottom of its five-year valuation range based on P/B, P/E, P/S and P/CF.
  7. Intel’s stock has been dead money for the better part of a decade and a half even as it consistently grew earnings and cash flow over that time period. This multiple shrinkage should be close to an end given its growth and valuation. One key indicator that demonstrates this is Intel’s PEG of 0.8.
  8. Intel should benefit from the rotation in the market currently underway to lower beta stocks with low valuations, good cash flow, and solid dividend yields with great balance sheets.
  9. Intel is the largest chipmaker in the world. It has a A+ rated balance sheet and is one of the few firms that can invest the billions it takes to build new fabrication plants and spread its bets around. It has great opportunities to grow in the server space in data centers, chips that use lower power, non-Apple (NASDAQ:AAPL) tablet PCs and will eventually break into the smart phone market.
  10. INTC is significantly under analysts’ price targets. Price targets are $28.50 at UBS, $28 at Credit Suisse and $26 at S&P. My own target -- given Intel’s valuation, growth prospects and dividend yield -- is 12 times expected 2011 earnings of $2.30 a share or $27 to $28.
Disclosure: I am long INTC.