Intel (INTC) Can 'Leap Ahead' in Next PC-Buying Cycle - Barron's

When thinking of computers or technology, it's hard not to imagine pictures of a busy Intel (NASDAQ: INTC) semiconductor production line, or two scientists in white lab coats debating over chip design. And that's exactly what Barron's thinks as they believe that Intel will be at the forefront during the next PC-upgrade cycle.

Shares of INTC have traded up from $4 to $75 just before the dot-com bubble late last decade, and are now trading at about $21/share. Barron's states that the stock is a little undervalued, with a potential upside of 25% or more spread out over the next few years.

The company is trading at 12.4x estimated FY10 EPS, below the industry-wide average of 15x. Intel, at its peak in 2001, was trading at a 67 multiple.

As Intel reported January 14, 2010, they had a fourth quarter that far exceeded what analysts thought would happen. The company had an EPS of $0.40, which beat by 10 cents, and revs of $10.6 billion, versus the analyst estimate of $10.16 billion. Analysts now see the company earning $1.63 for FY10 and revs of $40.55 billion. For FY11, revs are expected to be $43.25 billion and an EPS of $1.79.

The company also pays out a quarterly dividend of $0.14, translating to an annual yield of 2.8% to battle any downside that the stock may experience.

The company has reduced their workforce by 15%since 2006 and capital expenditures divided by revenue has dropped to 12% from 30% at their peak in 2001.

Intel gave peak gross margins (gross profit dividend by revenue) at 58 - 64%, below some analysts estimates of 65 - 70%, and about in line with their historical 60 - 65% average.

The company gets 74% of revs and 78% of operating profits from chips and motherboards. Some have sales of laptops in emerging markets shooting up 26% next year. U.S. sales of laptops could also rise 13%, countering the estimated 4% drop in sales of desktops.

Much of the ado is about the Microsoft (NASDAQ: MSFT) Windows 7 release, which may encourage many to upgrade their systems.

Many corporate computers are also five years old, the point at which it essentially becomes more costly to keep them (usually from software upgrades) then to purchase new systems.

Because of recent innovations by Intel to their chips, one new Nehalem EX-based server is estimated to be able to do the same work as 15 - 20 five-year-old servers.

However, despite all of the great innovations made by the company, the biggest mountain to climb is the political one. Last year, Advanced Micro Devices (NYSE: AMD) received $1.25 billion from INTC and the European Commission got $1.5 billion. December saw the FTC file a suit against Intel stating the the company was using unfair selling practices. Should the suit hold up in court, Intel may see their new graphics capable microprocessors be prohibited from being combined into one chip.

Another risk is that consumers are turning to their cell phones and other portable devices for their computing needs, a market that Intel doesn't have a huge stronghold in. They introduced their Atom processor in 2007, a chip that it utilized in net books right now. The chip is more power efficient and cheaper than competitors, and is currently being adapted for smartphones.

With different growth areas, and more efficient processors in the pipeline, Intel should be "inside" your portfolio.

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