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Intel and Microsoft: High Quality and Value

07/30/2013 8:00 am EST


John Buckingham

Editor, The Prudent Speculator

Two companies have disappointed investors with recent earnings reports; nevertheless, we remain bullish on both high-quality stocks, notes John Buckingham, value investor and editor of The Prudent Speculator.

Intel (INTC), the semiconductor giant, reported a mostly in-line Q2 earnings report with a disappointing outlook for the balance of the year. The chipmaker, Microsoft (MSFT), posted operating EPS of $0.39 on revenue of $12.8 billion.

Both numbers were well below last year's EPS of $0.54 and revenue of $13.5 billion, as personal computer sales have been quite weak, with consumers embracing smartphones and tablets.

However, the real consternation was caused by a $200 million shortfall in revenue guidance for the current quarter and a $500 million reduction in the full-year capital expenditure budget.

While we recognize that the near-term sledding will be tough, the high-quality shares continue to trade at multiples that are nicely below the five-year averages, and we think the dividend yield of 3.9% provides a floor to a stock price that is still up double-digit percentages this year. As such, we have left our target price for INTC at $28.

Hard as it is to be let down by a stock that has still returned 19% so far in 2013, frustrated investors sent shares of Microsoft skidding by more than 11%, after its latest earnings report.

The culprit was a very disappointing fiscal fourth quarter report in which the software behemoth turned in operating profit of $0.66 per share on revenue of $19.9 billion, well below expectations for EPS of $0.75 on sales of $20.7 billion.

Management blamed the "challenging x86 PC market" and poor sales of its Surface RT tablet computer, which led to a $900 million inventory adjustment charge.

On the positive side of the ledger, the company cited "ongoing strength in Enterprise" as well as "increased adoption of our consumer services: Office 365,, Skype, and Xbox Live."

Meanwhile, the stock trades for discounts to its five- and ten- year average multiples of sales, earnings, and book value, and that yields close to 3%.

We have knocked down our target price to $38, but its inexpensive valuation, the superb balance sheet loaded with cash, the strength in business computing, and its ubiquitous Windows operating system, leave us thinking that, for value investors, the stock is not only worth holding, but also buying, despite the obvious difficulties in the PC space.

As new MSFT CFO Amy Hood asserted, "This journey is going to take some time, but I believe we are making incremental progress."

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