...and Intel Inside

06/17/2005 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

"Is it time for tech?" asks Charles Carlson, editor of the  DRIP Investor. "I think the answer is yes, and I expect tech stocks to outperform the market in the second half of the year." Known as a conservative advisor, he focuses on Intel as his top pick in the tech sector.

"I’m becoming more bullish on tech stocks. One reason is that tech stocks are offering better values. Intel (INTC NASDAQ), for example, trades at 19 times its expected earnings for 2005, and 17 times earnings if you wash out the firm’s big cash stash. Despite the gains since we last discussed the stock in September, I think the best is yet to come for the semiconductor giant, which is why I’m now recommending the stock again.

"Intel is the world’s leading provider of integrated circuits. Revenue in 2005 should be around $38 billion. To give you an idea of Intel’s firm hold on the semiconductor sector, the company’s research and development spending of roughly $5 billion per year is greater than the total revenue of most of its competitors. Little wonder Intel has remained on top of its industry in terms of innovative products and technologies.

"The company is coming off a strong first quarter. Net income jumped 25%, with per-share profits coming in at $0.34, beating the estimates by $0.03. Intel should carry the momentum through the rest of the year. For the year, earnings are expected to come in at $1.35, up from $1.16 in 2004. Based on that earnings estimate, the stock trades at 19 times earnings. Furthermore, when you wash out the firm’s huge cash holdings of nearly $2.20 per share, the earnings multiple drops to 17 times the 2005 earnings estimate. That is a reasonable price to pay for an industry leader that generates huge amounts of free cash flow.

"Intel had some $13.6 billion in cash and securities at the end of the first quarter. It doubled its quarterly dividend at the beginning of this year, and dividends should continue to grow over the next few years. In addition to regular dividend growth, I would not be surprised if Intel implements special dividends over the next few years. Indeed, the big cash flow and large cash assets on the balance sheet increase the probability of one-time special payments similar to what Microsoft did last year.

"Intel traded in the mid-$30s every year since 2001. The firm has shown decent relative strength so far this year, and these shares should easily outperform the overall market over the next 12 months. Gains could be especially impressive if the nascent rebound in large-cap technology stocks continues. Investors should note that the company’s dividend reinvestment plan requires ownership of at least one share, and the share must be registered in the name of the investor, not in 'street' name.

"Overall, technology stocks are starting to show up with much stronger numbers in our proprietary Quadrix stock-rating system. Intel has traded at much higher levels in the past, and a strong breakout above $26 would be especially bullish. While tech stocks will run hot and cold on Wall Street, I would feel extremely comfortable owning Intel in a diversified portfolio, and the stock is currently my top pick in the tech sector."

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