Put Intel Inside Your Portfolio

01/08/2009 11:00 am EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says the chip giant will get through the recession fine, and its shares are at their cheapest price in years.

Technology stocks have sold off sharply over the last six months. Wall Street is concerned that companies and consumers are going to scale back dramatically their technology spending. The weakness in the group has knocked down the price of Intel (Nasdaq: INTC) shares over 40% from their 52-week high of more than $25.

While Intel’s business will be adversely affected by the recession, the stock, in falling to its lowest level in more than a decade, seems to be discounting an absolute disaster for the company’s bottom line. I believe the selling has been way overdone and expect these shares to register impressive gains over the next 24 to 48 months. Enhancing appeal is the yield of nearly 4%.

Intel is a world leader in the manufacture of integrated circuits. Products are used in a host of electronics and computer products. Foreign business accounts for more than 80% of revenues.

One of Intel’s strengths has been its ability to create new products. With research and development spending totaling some 15% of sales—or roughly $6 billion annually—look for a steady stream of new products to fuel long-term growth.

To be sure, the current economic climate will be a test for the company. Intel recently announced that fourth-quarter business will be below the company’s previous outlook. (On Wednesday the firm lowered its outlook for the second time, saying it now expects fourth-quarter revenue to be around $8.2 billion, down from its previous expectation of between $8.7 billion and $9.3 billion—Editor.)

The company said that revenue is being hurt by “significantly weaker-than-expected demand in all geographies and market segments.” Profit margins are also expected to decline below previous expectations. (Intel reports earning January 15th—Editor.)

For 2008, the consensus earnings estimate is $1.10 per share, down from $1.18 in the previous year. Analysts expect further erosion in profits in 2009, with the consensus earnings estimate of 82 cents per share. The reduced earnings should still more than cover the company’s dividend of 56 cents per share annually.

Also, Intel has a solid financial position, with $8.2 billion in cash and equivalents at the end of the September quarter and less than $2 billion in long-term debt. Thus, the firm has the financial firepower to ride out a prolonged slowdown [and] to buy assets on the cheap during the economic slowdown.

Intel has a history of rebounding strongly from weak economic periods. The stock has traded in the $20s or higher in each of the last 12 years, which means these shares could register solid price gains if history holds in 2009.

Investors should begin accumulating shares of Intel at current prices (around $14.50) and buy more aggressively on any pullbacks to the $12-$13 range. Intel offers a direct-purchase plan whereby any investor may buy shares directly, the first share and every share.

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