Intel: Expect Strong Gains In 2012

| About: Intel Corporation (INTC)

Intel (INTC) is a world class processor company. It has been changing the game since its beginnings in the late 1960's. It invented the world's first microprocessor and it has led the market ever since - sort of.

Intel's microprocessors are currently in over 80% of PCs worldwide, but in tablets, not so much. A large percentage of the tablets on the market right now use processors designed by ARM Holdings (ARMH), and that includes the popular Apple (AAPL) iPad. In fact, "ARM's chips represent 30% of the entire semiconductor market sales, which is nearly double Intel's 16%," according to CNN Money. "ARM is in a unique position in the chip industry because it doesn't actually make microprocessors. Instead, ARM designs chips and licenses those different architectures to more than 300 companies around the world, including giant players such as Samsung, Nvidia (NVDA), Texas Instruments (TI) and Qualcomm (QCOM)."

ARM is a leader in mobile technology, but Intel is trying to change that. Right now, the company is working on developing chips that are more power efficient, including its much anticipated Ivy Bridge (which is heat-efficient enough to allow a quad-core processor to be placed in a 13" MacBook Pro), Haswell and Medfield Atom chip products. Intel already has agreements in place for Motorola Mobility and Lenovo to use its Medfield chips in OEM. The Medfield platform will also be used in Intel's upcoming Studybook - a 10-inch tablet that is expected to be priced below $299 and will target emerging markets such as China and Brazil.

After completing extensive research, Intel is also developing a new product, designed to rival Apple's MacBook Air - the Ultrabook. They are supposed to combine "responsiveness, mobility with battery life and connectivity, aesthetics and solid design, and security" while offering better value and a more competitive price point. These Ultrabooks run Microsoft's (MSFT) Windows 8 and, while Apple enthusiasts may be deterred by the operating system, Intel's Ultrabooks will offer something Apple does not - touch input. It will also have some other differences that allow it to be less of a content consumption device and more open to content creation.

But, Intel runs the MacBook Air. So, why would it want to compete against them, especially considering that Apple has outpaced the PC market for 23 consecutive quarters? It could be a contingency plan, just in case Apple moves to using ARM to power its MacBook Airs much like the way Microsoft moved to offer ARM-support in its Windows 8 operating system. In fact, WinARM (Windows + ARM) should have its first notebooks hit the market in 2013, expanding even further in 2014 - a fact that is expected to erode some of Intel's lead, in spite of Intel's long standing alliance with Microsoft. And, Microsoft isn't the only one.

Only time will tell how this all plays out.

Right now, Intel is trading around $28 a share with an 84 cent dividend (3% yield) and it is priced about 10.64 times its forward earnings, which is a discount to its peers' 19.31. Analysts are estimating that Intel's earnings will increase by an average of 11.61% a year over the next five years. Quarter over quarter, Intel's earnings have increased by 21.2%, which falls short of its peers' 25.9%, but it seems strong otherwise. Its earnings per share increased by 8.5% compared to the same quarter last year and its fiscal earnings per share came in at $2.39 versus $2.05 the previous year.

In comparison, competitor ARM Holdings recently traded at $28 a share with a 17 cents dividend (0.60% yield). In addition to its low dividend, ARM is priced high at 32.80 times its earnings. Analysts are predicting that its earnings will increase by an average of 17.50% per annum over the next five years, after increasing by an average of 17.03% a year over the last five years. The increase sounds good and the new attention in the company is certainly a good thing, but I think it is a bit overpriced compared to Intel.

Intel rival Advanced Micro Devices (AMD) is also a consideration. While not as aggressive of a competitor as ARM, its products are used in some Apple devices, like the 15-inch and 17-inch MacBook Pro and it competes against Intel for inclusion in other personal computing equipment.

The company recently traded at just under $8 a share, and it does not pay a dividend. Advanced Micro Devices is priced even lower than Intel, with a forward price to earnings ratio of just 9.51, and analysts are predicting marginally stronger earnings growth for the company, estimating an earnings growth increase of 11.68% a year on average over the next five years.

The company is certainly priced well, but without paying a dividend, I wonder if the upside is there like it needs to be. On the plus side, the company recently completed the acquisition of SeaMicro, an energy-efficient, high-bandwidth microserver. According to Marketwire, "The acquisition of SeaMicro, which will now become AMD's Data Center Server Solutions business, enables AMD to accelerate its strategy to deliver disruptive server technology and provide its customers serving Cloud-centric data centers with highly-differentiated AMD-based solutions beginning this year." I think this is a great play and puts the company in a good position, but I am not convinced that now is the time to buy.

For the time being, I am keeping Advanced Micro Devices on my watch list. I recommend buying Intel and, while I think ARM is a good company, I do not recommend buying in until the price drops a little.

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