Shares in focus: Don’t write off Intel
Phil Oakley Feb 15, 2013
This highly profitable firm is not finished yet, says Phil Oakley.
Intel is the world’s leading designer and maker of microprocessors and chipsets for the computing and communication industries. Its products are used in electronic goods and information technology applications, such as PCs, tablet computers, data centres, smartphones, cars, factory systems and medical devices.
Intel also develops and sells software and services focused on security and technology integration. It owns McAfee, a leading computer-security software business. Intel had sales of $53.3bn in 2012.
The company was founded in 1968 by Robert Noyce and Gordon Moore. Their aim was to make semiconductor memory cheaper than that of the magnetic ones that were in use at the time. They secured the financial backing of a venture capitalist and called the business Intel, short for integrated electronics.
For most of its history, Intel has been successful by constantly innovating and staying ahead of the competition. In 1971, it made the first microprocessor, a computer on a chip. It then made more powerful chips that brought down the cost of computing. After a period of fierce competition, Intel won the race to supply its 8008 chip, which went into IBM’s personal computer in 1980.
The 1980s saw Intel lead the industry by making the best microprocessors for the growing PC market with its 80286, 80386 and 80486 products. Each one represented a step change in computing power. In the 1990s, Pentium processors and a move into motherboards (the main circuit board in a computer) saw Intel own more of the workings of the PC, which led to soaring sales and profits.
A further boost came from the development of the internet, where Intel met the changing needs of PC users, launching the cheaper Celeron microprocessor. It also branched out into network technology, such as routers, flash memory for mobile phones and wireless technology.
For most of the last decade, it dominated the microprocessor market, supplying to four out of five new computers. In 2007 it persuaded Apple to put Intel products in its Macintosh computers. Consequently it has been, and remains, highly profitable.
The chief executive
Paul Otellini joined Intel in 1974. He worked his way up before taking the top job in 2005. He has been credited with the introduction of the Pentium processor in the early 1990s. During the last few years he’s had a tough time as Intel has suffered from the decline of the PC market. His decision to retire in May 2013 led to speculation that he may have been pushed out. He took home $17.5m in 2011.
Should you buy the shares?
The bears are out in force and full of pessimism about the company’s prospects. They claim that Intel has tied itself to the declining fortunes of the PC and has been too slow to grab a decent chunk of the smartphone and tablet computer market.
They also think that successful chip designers, such as Britain’s ARM Holdings, will try and take business away from Intel’s data-centre business. This also raises the question of whether the likes of Apple and Microsoft will start putting ARM chips in their products.
But has a lot of this gloom already been reflected in the price of Intel’s shares? The shares are down 20% during the last year and look like they are priced for stagnation. If the pessimists are wrong, then Intel could be an interesting buy. It remains a very profitable business with strong finances (it has virtually no debt). It has cutting-edge research and development and top-class manufacturing capabilities.
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Yes, the PC market is shrinking, but it’s not collapsing yet. Many offices and businesses will be slow to change their habits. Intel also has a good data-centre business that contributes nearly a third of its profits and should continue to benefit from the growth of cloud computing. But can it crack the smartphone and tablet computer market?
It may be a difficult challenge, but Intel shouldn’t be written off yet. It’s put its weight behind Ultrabooks (very thin laptops) and hybrids (that can be used as a laptop or a tablet), but sales have been disappointing so far. A lot of hope is being placed in a new microprocessor that’s due to come out in June this year.
Code-named Haswell, it is rumoured to offer better graphics and longer battery life. A new CEO should also be announced soon and may breathe new life into the firm.
Intel faces lots of challenges, but we are tempted by its cheap valuation. Profits are not expected to collapse, while underlying cash-generation remains strong. We like the chunky yield and potential for share buy-backs, given the low valuation. It may take a while to put the business back on the right track, but any sensible steps in the right direction could see the shares go higher.
Share price: $21
Market cap: $104.5bn
Net assets (12/2012): $51.2bn
Net cash (December 2012): $4.7bn
P/e (current year estimate): 10.8 times
Yield (prospective): 4.3%
What the analysts say
Average price target: $23
P Otellini (CEO): 1,122,995
S Smith (FD): 163,537
A Bryant (chairman): 316,930
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