Is Intel Inside Your Portfolio?

Nov. 1.11 | About: Intel Corporation (INTC)
At Helix Investment Management, we own stocks that are of all stripes. From fast growers like Chipotle and Apple, to speculative biotechs like Human Genome Sciences, to defensive names like Costco and UPS. We look for defensive stocks that are able to grow EPS and dividends in any kind of environment. Such companies are rare, and we would like to highlight one of them today.

Intel (INTC) is the world's leading chipmaker. Its chips power 80% of the world's computers, and most of the world's servers run on its chips. Despite a run of nearly 25% over the past year, Intel still trades at a P/E of under 11, and we think that this does not reflect Intel's true potential.

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Intel's chips are present nearly everywhere, and the company has been able to leverage its dominance into quarter after quarter of record profits and revenue. However, there is a consistent overhang on the stock, one that we would like to dispel. Intel's chips are missing from one crucial tech category: the iPad. Sales data shows that the iPad is the only tablet worth considering. Motorola Mobility (MMI) shipped only 100,000 Xoom's this quarter, and the RIM (RIMM) PlayBook has already become largely irrelevant. We are eager to see the competition in the tablet space continue. ARM Holdings (ARMH) has been the prime beneficiary of the tablet market's explosion, and it has triggered a nearly 65% rise in the stock over the past year. Intel cannot buy its way out of the problem, as a takeover of ARM would never be approved by the EU and the FTC. Critics of Intel argue that its growth will stall as tablets cannibalize PCs. But, there are several points that we would like to remind readers of that will show that Intel and its stock will suceed despite this overhang. The following are reasons why Intel is a great buy at these levels:
  1. Emerging markets: We think that the PC has become ubiquitous in the world, and that everyone already owns one. This is blatantly false. Before an iPad can cannibalize PC sales, those sales must occur. And they are occurring rapidly in emerging markets. On the conference call, CEO Paul Otellini stated that, "trends inside the quarter played out largely as we expected. While consumer demand in mature markets like Western Europe and North America remained soft, Enterprise PC demand remained strong and consumer demand in emerging markets continued to rise year-over-year. China was up 12%, India 21%, Turkey 14% and Indonesia 23%. The Global PC landscape is being reshaped. Emerging markets now represent 2 of the top 3 consumption PC markets in the world. China is now the #1 PC consumption market in the world, while Brazil has become #3." Emerging markets now represent the bulk of PC sales, and Intel stands to benefit enormously from that trend, given that its chips are in 80% of PC's. The Asia-Pacific region now accounts for 57% of Intel's revenue.
  2. Server sales, a backdoor investment in the cloud: Intel not only dominates the PC chip market, it dominates the server chip market as well, with 90% market share. One of the fundamental truths of tablet sales and the mobile computing revolution is an explosion of internet and data traffic. To manage that traffic, carriers and ISPs must have servers. And who provides 90% of the chips for these servers? Intel. The division grew by 15% this quarter, and growth should accelerate right alongside growth in the smartphone and tablet sectors.
  3. McAfee and Mobile: The software and services group, led by McAfee, became profitable this quarter, and contributed over $1 billion in revenue. Going forward, the mobile communications segment, which grew 68% this quarter, should accelerate as Intel leverages its enormous balance sheet to aggressively invest in the business, raising its profitability.
  4. Competition: Intel's business is without a doubt a competitive one, but we think the competition is manageable. AMD (AMD) is the company's primary competitor, but the only reason the company even exists today is that Intel's customers do not want to give it complete leverage over them. Intel's chips are vastly superior to AMD 's, and AMD, while profitable, is a company that does not have the financial resources to effectively compete with Intel. ARM is a fellow chipmaker, and while Intel hasn't been able to conquer mobile chips, its addressable market is still large enough for the company to have little need to defeat ARM. But, the company is trying hard, investing billions in R&D, and its Medfield mobile chips will begin appearing in mobile products within the first half of 2012.
  5. Valuation & Capital Allocation: Intel trades at a forward P/E of less than 10, and has grown earnings at a CAGR of 7.5% over the past 5 years. Cash flow is growing at an average of 4% annually, and the company posted record cash flow of $6.3 billion this quarter. Intel has allocated billions to buying back stock, and bought back 186 million shares in Q3. And the company still has $14.2 billion in authorization. Intel currently has a dividend yield of 3.36%, and the dividend is growing at an average of 14.5% a year. Intel's impressive cash flows are accelerating, supporting continued buybacks and dividend increases.
  6. Balance Sheet: Intel has $5.2 billion in net cash on the balance sheet, a number that has steadily been increasing. Intel's balance sheet allows it to invest in its business in ways few other chipamkers can, thus consolidating the company's control of the sector and increasing its profits. Click to enlarge

Intel is a company that has a remarkable track record of innovation, and it will continue to innovate going forward. We think now is a great time to add to or initiate a position in a company that is far ahead of its competition, has a great valuation, and a pristine balance sheet. Analysts agree with us. Credit Suisse sees the stock at $32, Argus sees it at $29, and S&P sees it at $27. These targets will rise as the company continues to post record profits and soothes fears that the tablet market will reduce its sales. While we are firm believers in the tablet "story," and have been long Apple for years, there is room for both tablets and PCs in this market, a fact that many on the Street have overlooked. The time to invest in Intel is now, before the company proves its critics wrong. Intel is inside the center of the computing world, and it should also be inside your portfolio.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INTC over the next 72 hours.