Intel Blowout Quarter Presents an Opportunity

“On Thursday, after the close, Intel reported a super-duper “I love you, you love me” total blowout. They outpaced The Street’s consensus earnings by ten cents on strong sales …When the company blows numbers out like Intel you want to throw up your hands…Intel is selling more chips and getting more money for them. As the average selling price for microprocessors was up, even as PC pricing is coming down…

The bottom line, Intel may have sold off the day after reporting the fabulous fourth quarter but the pull-back was because the stock was ahead of itself.”– CNBC’s Mad Money 1/19/2010

Intel Corp. (INTC) delivered a tremendous fiscal fourth quarter last week, but the stock gapped down nearly 3% on the following day and has yet to recover. This head-scratcher of a situation has CNBC’s star pundit Jim Cramer felling bullish on Intel, and he even said that he’s increasing his exposure to Intel in his Charitable Trust if it falls below $20. We can understand why he is bullish on Intel upon completing a great second half to 2009, and the turnaround in technology spending (just as Intel’s CEO predicted last September) is being solidified through results from other technology bellwethers like IBM (IBM).

Intel’s lack of appreciation after a great quarter has led to a frenzy of analysts increasing earnings targets over the past week. According to Yahoo finance, 36 out of a total of 45 analysts following the stock have increased their predictions for 2010 EPS and lifted the consensus from $1.64 to $1.79 in just a week’s time! Despite the improved performance for Intel over the last two quarters and the improved outlook for 2010, the stock has actually substantially underperformed the rest of the Technology sector over the last six months as measured by the iShare (IYW). Intel has returned about 10.5% compared to the sector performance of over 20%.

At Ockham, our valuation methodology rates this stock as Fairly Valued. One criterion in our analysis is a look at current price-to-sales metrics compared against historically normal ranges. Over the last ten years the market has been willing to pay between 3.1x and 5.6x sales per share, and the current multiple is on the low end of that range at 3.3x. Similar historical studies of price-to-cash earnings, historical ROE, etc show a similar story: Intel is neither overvalued nor particularly undervalued. Judging by the way the market has traditionally valued Intel shares and comparing that with current fundamentals, we think a price between $19 and $26 would be in line with historically normal valuations over the past ten years. However, the fourth quarter demonstrates Intel is really hitting its stride right now, and may finally begin to command a better valuation in the marketplace shortly.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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