Intel (INTC) is the largest semiconductor chip maker in the world by revenue. The company develops advanced integrated digital technology, primarily integrated circuits, for industries like computing and communications. Integrated circuits are semiconductor chips which have been etched with interconnected electronic switches. It also develops computing platforms which can be defined as integrated hardware and software computing technologies combined to provide an optimum solution. The company is changing from a company with a major focus on the design and manufacture of semiconductor chips for PCs and servers to a computing company that provides complete solutions in both hardware and software platforms as well as support services.
For the quarter ended September 30th, 2012, Intel reported quarterly revenue of $13.5 billion, operating income of $3.8 billion, net income of $3.0 billion and EPS of $0.58 a share. The company generated over $5 billion in cash from operations paying dividends of $1.1 billion and using $1.2 billion for stock repurchases. PC Client Group revenue at $8.6 billion was flat compared to the preceding quarter and down 8% year-over-year. Data Center Group revenue at $2.7 billion was down 5% from the preceding quarter and up 6% on a year on year basis Other Intel architecture group revenue of $1.2 billion was up 6% from the preceding quarter but down 14% year on year. Gross margin at 63.3% was 1.3% above the midpoint of the updated expectation of 62%. The outlook for the current fiscal is revenues of $13.6 billion (plus or minus $500 million) and gross margin percentage of around 57% to 58 %.
There is no doubt that the PC market is going through a bad time with declining demand and most of the companies associated with PCs whether in hardware or software or accessories were not show impressive results. This includes the likes of the Microsoft (MSFT), Hewlett-Packard (HPQ) and Dell (DELL), However, the personal computer is not going to go away and the companies in the industry are not about to fold up overnight. I personally believe that personal computers especially laptops can continue to coexist with mobile devices like smart phones and tablets for some time to come. Large institutional users in spaces like business and education are not going to walk away from PCs because of the very considerable cost, like retraining, involved in the switchover to any other device.
It is true that Intel has considerable catching up to do in the area of mobile devices. There is a genuine fear that ARM Holdings (ARMH) and the companies in its ecosystem like Qualcomm (QCOM), Nvidia (NVDA), and Applied Micro (AMCC) will try to prevent Intel from cashing in on the mobile devices market while challenging its dominant position in the PC market. These fears can be understood but Intel has to be understood in the context of its technical and financial strengths. It has enormous economies of scale in the PC business and is therefore able to spend money on research and development while keeping its prices down. Technical prowess and the ability to outspend any of its competitors make it almost certain that the company would succeed in the mobile device market though it may not achieve the kind of dominance that it has in PCs. Intel has already joined hands with two big smartphone manufacturers, Motorola and Lenovo, and is entering the tablet market with Microsoft's Surface.
The second area of concern could well be the sustainability of the highly attractive dividend yield which currently stands at over 4%. The company has a substantial free cash flow and I think that there is scope for dividend growth because the current payout ratio is only 34%.
The stock is currently trading at around $21.46 which is just above its 52 week low of $21.22 and means a price/earnings ratio of under 10, a discount of more than 30% on the market as a whole. The dividend yield alone would justify investment at an income stock. In addition to this, some experts using DCF valuations reckon that the fair value is anything between $35 and $40. I believe that the market had overreacted to the earnings announcement and that this represents a wonderful buying opportunity. You are looking at the unbeatable combination of an outstanding income stock with a considerable upside for the stock price. I strongly recommend that you buy Intel today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
