Intel: Closing The Gap?

| About: Intel Corporation (INTC)
This article is now exclusive for PRO subscribers.

Analysts at Baird lowered their rating on Intel (INTC) stock to Neutral citing weaker than expected seasonal demand in the semiconductor industry will deepen the company's problems. They set a new price target of $23 per share based on a 12 to 13 times price/earnings (P/E) multiple to their reduced earnings per share estimate of $1.85. [ValueWalk]

The P/E Baird used is . .

  1. well below Intel's five-year median of 16, and
  2. way below the 22 industry median

. . and is based on continued slowdown in growth of sales in personal computers (PC) and competition from companies like ARM Holdings (ARMH).

That's the story on Intel, that they're too exposed to a collapsing PC market, and not competitive in the shift to mobile devices. What if they close the gap on mobile competitiveness?

Here come the new chips from Intel

Like the cavalry arriving just in time in an old Hollywood movie, Intel's roll-out of new chips designed to beat the bad guys sound like thundering hoofs. Intel is expected to release:

  1. "Bay Trail" Atom tablet central processing units (CPUs) fourth quarter 2013
  2. Merrifield Atom smartphone CPUs year's end 2013
  3. "Cherry Trail" Atom tablet CPUs in third quarter 2014
  4. "Willow Trail" Atom tablet parts in fourth quarter 2014

In an all-out push to gain mobile CPU share from Qualcomm (QCOM), Nvidia (NVDA), and MediaTek, Intel is narrowing the delay between Core (for PC) and Atom CPU launches for a given architecture. Ramping 14 nanometer (NYSE:NM) Atom production in 2014 gives Intel a process edge over rivals still at 20nm. [Seeking Alpha]

But wait, there's more . . .

With 40 different spectrum bands allocated for high speed mobile data system all over the globe, LTE brands play an important role for Intel who claim its XMM 7160 chip has a performance edge over Qualcomm's multimode LTE chips. Thomas Lindner, senior director in their mobile and communications group, takes the view that with the 7160 "there could be only one chip for phones sold all over the world."

Smartphones need technology enabling them to switch between 2G, 3G, and 4G modes. Intel 7160 chips to the rescue.

Don't forget the world's largest chip maker also acquired the Infineon wireless business in 2010, to help it beat the dominant Qualcomm at its own game. Hermann Eul, vice president and general manager of Intel's mobile and communications group, says Infineon is moving toward market leadership since the acquisition. As he sees it:

"For us, it is the clear strategy, the clear plan, to go into a leadership position, and we are currently in the transition to do that."

With such force behind it, Intel can bring the heat to the mobile chip industry. [ValueWalk]

Intel fundamentals are good

Even with the question of whether Intel will close the technology gap with its competitors, its fundamentals look strong. Their:

  1. debt-to-equity ratio is below industry average at 0.25
  2. quick ratio is 1.83, meaning they can cover short-term liquidity demands
  3. gross profit margin is 73% [The Street]
  4. dividend yield is 3.9%, well above 2.2% industry average
  5. operating margin is currently among the highest in the industry at 27% (sector median is 2.2%)
  6. net margin, return on equity, return on asset, etc. are all significantly above industry medians [The Motley Fool]

Intel has been underperforming its peers since April 2012. With such a successful history, massive market position, and so many things going for it, many trust the company to be indispensable for the sector's production. Qualitatively, its vertical integration (unique in the sector), best-in-class fabrication, and impressive R&D spending [The Motley Fool] make that trust worth noting.

Bet Intel will close the gap

The book on Intel says they're out of step with the industry, that they can't compete in the mobile device market. What if they close the gap and revert to form as market leaders? Just getting back to their 5-year median of 15 to 16 times earnings would mean a jump in stock price to $28 from around $23, a 20+% increase to interest any investor.

If they are seen as closing the competitive gap with all these product launches, they might even approach the industry P/E of 22, meaning a 78% hike in stock price. Enough to take the bet?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.