Buy Intel (INTC)

01/15/2010 2:52 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Sell on the news, is it?

Well, thanks.

I thought Intel (INTC) would run away from me after yesterday’s (January 14) great earnings report but apparently traders have decided to take profits on the news ahead of the long Martin Luther Day weekend. And that gives me a chance to add the shares of Jubak’s Picks.

(I think it looks increasingly like the market will be able to depend on technology stocks for leadership in early 2010. Good thing because the other sector showing signs of leadership recently, financials, looks likely to stumble. See my post http://jubakpicks.com/2010/01/15/even-jpmorgan-chase-is-still-putting-new-money-away-to-cover-bad-loans/ )

Intel reported fourth quarter earnings of 40 cents a share, 10 cents a share better than Wall Street projections, and revenues of $10.57 billion (up 28.5% from the fourth quarter of 2008) and above the $10.17 consensus. Gross margin came in at 65% versus a Wall Street projection of 62.2%.

For the first quarter of 2010 Intel told Wall Street to expect revenue of $9.3 billion to $10.1 billion versus Wall Street’s pre-earnings report projections of $9.35 billion.

Intel’s results were especially strong for chips for servers where average selling prices increased, for notebooks, and for the low-power Atom processor designed for netbooks.

With Wall Street expecting an upturn in PC sales—which Intel’s results and comments confirmed—where did the surprise come from?

Some of it from a traditional Intel source, the extra margin that the company gets from relentlessly shrinking its chips. Intel is just starting to ramp its 32 nanometer lines to full production. Typically Intel sees costs drop and margins increase when it puts a new generation of production technology into full production. That seems to have started again in the fourth quarter and is likely to continue, I believe, in 2010.

In its conference call the company also noted that inventory at distributors fell in the fourth quarter from the third quarter of 2009 so it doesn’t look like the results came from stuffing the channel with unsold product.

The company’s decision to up capital spending to $4.8 billion in 2010 from $4.5 billion in 2009 also speaks to Intel’s belief that its chip business is moving into a multi-year growth cycle.

As of January 15 I’m adding Intel to Jubak’s Picks. The stock currently trades at 13 times 2009 earnings per share with Wall Street predicting earnings growth of roughly 50% in 2010. I’m setting a target price of $27.20 a share for December 2010. That’s 16 times my projection for $1.70 in earnings per share for 2010.

Full disclosure: I do not own shares of any company mentioned in this story in my personal portfolio.

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