A Fresh Look at 3 Big Tech Names

07/14/2011 8:30 am EST


Richard Moroney

Editor, Dow Theory Forecasts

While tech is on everyone’s tongue, there are some opportunities in some of the big names, says Richard Moroney of Dow Theory Forecasts.

In a year when the S&P 500 Technology Sector Index has slipped 1%, Intel (INTC) shares have squeezed out a 2% gain. The stock is 11% below its 52-week high set in May, providing investors with an attractive entry point.

At ten times trailing earnings, the stock’s P/E languishes near its lowest level in more than a decade. Yet analyst estimates are drifting higher, with the consensus calling for Intel to earn $2.29 per share this year, implying 12% growth.

The shares trade at less than ten times the 2011 estimate, 36% below the average semiconductor stock in the S&P 1500 Index. Intel is a buy now and for the long term.

Rear Windows
Any trepidation harbored by investors toward Microsoft (MSFT) is understandable. Demand for personal computers remains weak, and Microsoft has failed to recreate the success of its once-ubiquitous Windows operating system in the mobile market.

Over the last eight years, the share price has risen just 1%, despite the company shaving nearly 22% off its share count during that period, through a series of aggressive buyback programs.

In June, Microsoft introduced Office 365, an online version of its popular software suite. With the move, Microsoft takes aim at Google (GOOG), which has siphoned off corporate customers with its own Web-only applications.

Monthly charges for Office 365 will range from $2 to $27, versus a flat annual fee of $50 for Google Apps. The market for such cloud-computing services is projected to grow more than 27% a year, reaching $73 billion by 2015.

Shares look cheap from every angle. At less than 11 times trailing earnings, the stock trades 34% below its five-year average and 44% below its systems-software peers in the S&P 1500 Index.

Excluding net cash of $4.49 per share, Microsoft’s trailing P/E is less than nine. Shares also trade at discounts to historic averages based on trailing sales, operating cash flow, and book value. Microsoft, yielding 2.5%, is a long-term buy.

A Productive Exchange
NASDAQ OMX Group (NDAQ), since losing out on its bid to purchase NYSE Euronext (NYX), has considered other acquisitions in an industry where economies of scale can provide a huge advantage.

NASDAQ didn’t wait long to make an offer for LCH.Clearnet, Europe’s largest clearinghouse. LCH.Clearnet is reportedly weighing multiple offers. NASDAQ could also consider a merger with the London Stock Exchange.

But the stock’s near-term outlook and cheap valuation make it a compelling pick even if it fails to land either deal. Wall Street sees NASDAQ earning $2.44 per share in 2011, implying 22% growth, on 9% higher revenue.

Shares trade at ten times the 2011 profit estimate, a 35% discount to its peer group. The stock’s trailing price-to-earnings ratio of 11 seems unlikely to return to the five-year average of 20 any time soon.

But if the P/E merely holds at 11 and NASDAQ meets the 2011 consensus, shares stand to gain 12% by early next year. An expansion to the three-year average P/E of 13 would drive a 32% gain. This is another buy now and in the long term.

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