U.S. stocks have broadly enjoyed a significant rally off of the 2020 lows. The S&P 500 Index is now positive year-to-date, which seems hard to believe given the troubles facing the U.S. economy. The massive comeback has returned many stocks to elevated valuations last seen before the coronavirus arrived.
Investors may understandably view stocks as overvalued. But we still see pockets of value in certain industries.
An example is Intel Corporation (INTC), which has fallen 18% since releasing quarterly earnings results on July 23. Intel is a major holding of many institutional investors. For example, it is the top holding of investment manager LSV Asset Management, which oversees $80 billion in assets.
However, the drop in Intel stock should be welcomed by investors, as it brings Intel stock back down to an attractive level. With a 2.7% dividend yield and future growth potential, we rate Intel stock as a buy.
Earnings Selloff Overdone
Intel is the largest semiconductor company in the United States. It manufactures microprocessors for personal computers, shipping about 85% of the world’s microprocessors. Intel also manufactures servers and storage devices that are used in cloud computing. The company generates over $70 billion in annual sales.
Intel stock declined 16% following the release of disappointing quarterly earnings results on July 23. For the second quarter, Intel’s revenue increased 20% to a record $19.7 billion. Earnings-per-share increased 29% for the quarter. While these certainly look like acceptable results, especially given the weak overall economic climate, investors were nevertheless disappointed by the announcement that it was delaying its release of 7nm CPU products for another 6 months beyond its previous timetable. Intel now expects the product line to launch in late 2022 or early 2023.
While it is understandable that investors would not take kindly to the news, we view the severe stock drop as an overreaction. The core fundamentals of Intel’s business continue to look strong. The company’s PC-focused business grew its revenue by 7% in the most recent quarter, and is benefiting from the work and learn at home trends that have accelerated due to the coronavirus pandemic. Notebook sales more than offset desktop declines for the quarter.
Separately, Intel’s data-centric businesses grew revenue by 34% to $10.2 billion. Intel has a large data center business, which is the primarily driver of growth and registered a 43% revenue increase for the second quarter. This business benefited greatly from 47% growth in cloud service provider revenue.
Offsetting growth were declines in certain areas that are exposed to coronavirus-related markets. For example, the company’s Internet of Things (IoT) group declined 32%. Mobileye revenue dropped 27% on lower automotive production due to COVID-19.
Intel: A Buy For Value, Income, And Growth
Intel expects revenue of $75 billion in 2020 and earnings-per-share of $4.85. Based on this EPS estimate, shares trade for a price-to-earnings ratio of 10.2x. We view fair value as a price-to-earnings ratio of 13, given the company’s strong growth and competitive advantages. Intel’s key competitive advantage is that it is the largest and most dominant company in its sector. This gives the company size and scale that competitors cannot match.
A rising P/E multiple to our fair value estimate would lift annual shareholder returns by 4.4% per year over the next five years. Shareholder returns will also be generated from future earnings-per-share growth, which we estimate at 5% per year and consisting of revenue growth and share repurchases.
Finally, the current dividend yield of 2.7% will add to shareholder returns, leading to total expected returns slightly above 12% per year over the next five years.
With a projected rate of return above 10% and a market-beating dividend yield, we rate Intel as a stock to buy.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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