Why Intel Shares Are Worth Buying On A Drop To $22 Or Below

| About: Intel Corporation (INTC)
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In the latest warning sign for chip makers, Intel just lowered sales projections for the third quarter of 2012. This was not a total surprise for many investors as another chip maker, Arm Holdings (NASDAQ:ARMH) stated just days ago that financial results might come in below expectations in the coming months. A recent Financial Times article summarizes the concerns of ARM Holdings CEO, Warren East, stating:

"However, according to Mr East, much of the industry is keeping its expectations low as economic uncertainty made consumers delay purchases of gadgets. 'Many of the chip companies are indicating that they are not expecting an uplift and mathematically that will hit us,' Mr East said."

It appears that the typical strength that comes for PC sales in the back-to-school and holiday shopping season, might not be coming to pass this year. This could lead to excess inventory, price cuts, and reduced profit margins for any company in the PC supply-chain. That could lead to better buying opportunities later this year with certain stocks in this sector. Here is a closer look at two top chip stocks:

Intel Corporation (NASDAQ:INTC) shares have been coming under pressure due to headwinds in the tech sector. Slowing PC sales have cause many analysts to become more cautious. One recent Forbes article summarizes the concerns and in regards to Intel, it states: "Wang notes that 'industry inventory levels are extremely high and could result in sharp number cuts which could lead to weakness in the stock.'" Earnings estimates have been coming down in recent weeks and that could lead to a lower stock price, especially if estimates are still too high. It seems that the weakness could persist for at least another couple of quarters, so it is probably too early to buy the stock. However, the shares look attractive longer-term, as Intel remains a market leader in the chip sector.

While some might believe there is a secular decline in the PC business, it could just be a pause as tablets like the Apple (NASDAQ:AAPL) iPad temporarily slow the rate of sales for traditional laptops. Once the tablet market is more fully saturated, consumers might budget for their next tech purchase to be a PC. Microsoft's (NASDAQ:MSFT) recent introduction of Windows 8 should also add one more reason for businesses and consumers to (sooner or later) upgrade their PC's. Furthermore, once Intel's top customers work off some of the excess inventory, a more balanced supply and demand environment should eventually pave the way for stronger order growth. Finally, Intel also appears to be making progress on developing next-generation chips that address the needs of the low power market for devices like tablets and smart phones. This is another reason why the stock has long-term appeal, especially at around $22 per share, or less. Longer-term investors should be focused on the fact that it has a strong balance sheet and it offers a dividend yield of 3.6%, which will eventually help to support the share price. Global economic concerns, and slowing sales in the PC sector could be setting Intel shares to bottom out around the $21 to $22 per share range. This is right around where Intel shares bottomed out at, in late 2011. That would be a more attractive buying opportunity for longer-term investors.

Here are some key points for INTC:
Current share price: $24.35
The 52 week range is $19.16 to $29.27
Earnings estimates for 2012: $2.38 per share
Earnings estimates for 2013: $2.55 per share
Annual dividend: 90 cents per share which yields 3.6%

ARM Holdings, PLC. shares recently dropped after an analyst at Deutsche Bank (NYSE:DB) cut the rating on the stock from hold, to an outright sell. The concern seems to be based on the valuation of the stock which trades at an elevated price to earnings ratio when compared to many rivals. For example, Intel trades for about 11 times earnings, while ARM Holdings shares are trading at about 35 times earnings. Also, the analyst cited concerns that the average selling price or ASP was poised to decline. A recent Barron's article summarizes the concerns of one analyst and it states:

"And he sees lower chip average selling prices from partners such as
Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA) and Broadcom (BRCM), thanks to lower prices in for mobile devices, driven by Google's (NASDAQ:GOOG) commoditization of the market with its Android software. That, in turn, threatens royalty rates for ARM."

ARM Holdings has seen growth over the past few years as it has leading edge designs, which are being used in some of the world's most popular smart phones and tablets. However, with signs of a sales slowdown, and a stock valuation that appears too optimistic, it seems to be too early to consider buying the shares.

Here are some key points for ARMH:
Current share price: $26.24
The 52 week range is $21.64 to $31.55
Earnings estimates for 2012: 69 cents per share
Earnings estimates for 2013: 84 cents per share
Annual dividend: 14 cents per share which yields .5%

Data is sourced from Yahoo Finance. No guarantees or representations
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informational purposes only. You should always consult a financial

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.