A Fire Sale on a Tech Giant

09/18/2008 12:00 am EST

Focus: STOCKS

Michael Murphy

Former Editor, New World Investor

Michael Murphy, editor of New World Investor, says chip sales are holding up and Intel is a bargain.

Texas Instruments (NYSE:TXN) recently held its mid-quarter update conference call. The company tightened its guidance range while leaving the midpoint unchanged, which is to say their business is developing exactly as expected in spite of recent rumors that cell phones are weakening.

So, in spite of the chaotic economy and general Wall Street fears of disappointing third-quarter results, it sounds like business in Asia will be strong enough to offset weakness in the US. Intel (Nasdaq: INTC) probably will surprise to the up side when they report on October 14th.

The aversion to risk is now so strong that major tech stocks like Cisco (Nasdaq: CSCO), Hewlett-Packard (NYSE: HWP), and Intel are all selling at forward P/E ratios in the low to mid-teens.

Intel has slipped on fears their business will slow, even though management went out of their way on their recent conference call to say they see no weakness. But the market research firm Gartner reduced their 2008 forecast for semiconductor sales from $287 billion to $285 billion. That's a change of less than 1%, a rounding error in the market research business. But they also said they will probably keep cutting their projections in coming quarters if the US economy weakens. Their latest forecast would show 4.2% growth for the year.

But consumer electronics, personal computers, and cell phones now account for about 80% of chip demand, and demand has been strong in China, India, and the rest of Asia. The first three priorities for Asian consumers are buying their cell phone, television, and DVD players. After that, they look to trade the inconvenience of Internet cafes for a home PC. Thanks to declining PC prices and much more availability of inexpensive broadband, the data through the first half of 2008 suggest this is what has been happening.

Memory chip prices are in the toilet, though, and that is holding down the overall revenue numbers. But for Intel, low DRAM prices are good news, because it makes personal computers cheaper and drives demand for microprocessors. Both Dell and Hewlett-Packard reported their July quarters in August, and said PC demand is holding up well.

I don't see anything bad here for Intel. Investors don't seem to believe that Intel is having a very good year, with earnings coming in as expected when the stock was up at $27. (It traded below $19 Wednesday—Editor.) This is one of the first stocks the big institutions will buy when they decide to put money to work to catch an upturn.

The Intel January 2009 $22.50 LEAP call (NQAX) is a Top Buy at current levels, and can be bought up to $6 for my $12.50 target, which assumes INTC stock hits $35 by expiration. Even if it falls short, there's great money to be made here as Intel moves toward and into the $30s. (It traded a little above 50 cents Wednesday—Editor.)

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