Intel: A Strong Play For Value Investors

| About: Intel Corporation (INTC)

Computer chip manufacturer Intel (INTC) will look like one of several different categories of stock investments, depending which data you view. The stock may be viewed as a stable, blue-chip company, paying a decent yield with steadily increasing dividends. Or, the company may be viewed as an out-of-gas tech company that has been overtaken by smaller, nimbler competitors. A review of 2011 results show Intel as a reborn growth company. A look at the predicted results for 2012 and future years makes an investor wonder where the growth went. At this point, I view Intel as a value stock with the potential to surprise analysts and markets going forward.

Intel posted record revenue, operating income and net income in 2011. For the year, the company earned $2.39 per share, up from $2.01 on revenue of $54 billion, up from $43.6 billion. The sales number was 24% better than in 2010 and the net income per share was a 19% improvement. Per-share profit improvements in 2010 and 2011 were a breakout from a seven-year trend of annual profits fluctuating in a range of 80 cents to about $1.40 per share. From 2009 to 2011, Intel increased operating cash flow from about $11 billion annually to almost $19 billion. A large amount of cash flow gives a company like Intel added flexibility to use that money to enhance shareholder value.

Competing with Intel for the sales of computer processor chips are Advanced Micro Devices (AMD) and ARM Holdings (ARMH). Advanced Micro competes head to head with Intel to sell processors for desktop and laptop personal computers, plus processors for computer server systems. For 2011, Advanced Micro reported operating income of $524 million on revenue of $6.57 billion. Both income and revenue results were flat compared to 2010. The processors from ARM Holdings are going into the hot growth products of smartphones and tablet computers. However, this sector of computer processor chips is still dwarfed by traditional personal computers. In 2011, ARM Holdings reported operating earnings of $149 million on revenue of $492 million.

Wall Street analysts' 2012 forecasts on Intel point toward flat results for the year. The consensus estimates predict revenue will increase by 4.5%, to $56.6 billion, and net income will increase by just 2 cents per share, to $2.41 per share. There are at least three reasons why the Wall Street crowd may be underestimating the 2012 performance of Intel:

-- Microsoft (MSFT) is expected to launch the next version of its Windows operating system -- Windows 8 -- in the second half of 2012. A new version of Windows typically is a strong boost for personal computer sales and, in turn, processor sales for Intel. Also, Intel is making its own marketing efforts to promote a new type of thin and light laptop computer called Ultrabook. If the Ultrabook concept develops some momentum and sales, the results will be positive for Intel.

-- Data center server processor installation rates are forecast to increase by a level of magnitude. For the 10-year period from 2000 to 2010, data center processor sales growth doubled. The next doubling of sales will take just five years as more and more of the world's data go into cloud storage systems.

-- In 2011, Intel spent $14 billion of its cash flow to buy back 642 million shares, or about 10% of the shares outstanding. 10% fewer shares results in roughly 10% higher income per share if net income in dollar terms stays level.

Intel will most likely boost its dividend for the August record date payment. The company has stated it intends to keep the dividend at about 40% of net income. Using the recent income figures, the dividend could be increased to 24 cents per quarter, up 14% from the current 21 cents. After the big share buyback in 2011, a dividend increase to 25 cents would not be a big surprise -- if you read it here first. The market would be surprised and push up the share price.

With shares trading at less than 12 times 2011 and projected 2012 earnings, the Intel price-to-earnings ratio is well below the current 16 multiple of the S&P 500. The relatively low P/E ratio plus the 3% dividend yield should provide a share price or value support for Intel. It is also interesting to note that the five-year earnings growth estimate of 11.6% closely matches the earnings ratio at the current share price. Unless there is a serious contraction in global personal computer sales, the most likely case for sales and earnings surprises from Intel is for positive surprises. The stock market sentiment may lean toward the idea that smartphone and tablet computer sales will eat into personal computer sales, which generate Intel's revenue. The outcome forecast here is that tech buyers will continue to buy and own computers and will buy smartphones or tablets as additional devices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.