Share tips: Tech giant enters deep-value territory

My two teenage daughters are badgering me to buy them new computers. But I am deliberately holding off until the launch of Microsoft's Windows 8 operating system on 25 October. I am not alone millions of other people seem to be doing the same thing. That's not great news for the PC market, as sales have stalled ahead of the launch.

One high-profile casualty has been Intel, the $110bn tech giant that is the brains behind 80% of all computer chips. It was forced to trim its revenue target for the next quarter by 7% to between $12.9bn and $13.5bn. That has dragged the stock price down into deep-value territory; it now offers a 3.5% dividend yield and trades on a price/earnings(p/e) ratio of just 10.5. Here's why I think it's now a buy.

Firstly, before the end of the year there should be a powerful rebound in PC orders as consumers replace older machines with much slicker, lightweight ultrabooks especially as Christmas approaches. Apple has already led the way here iPhone volumes fell immediately prior to the release of its fifth-generation device, but then shot up again.

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Meanwhile, other parts of Intel's business are holding up well chips for servers, McAfee anti-virus software and IT services are all going strong. I also think the sceptics have been far too quick to write off the group's fledgling tablet and smart-phone expertise.

True, it has ceded the initiative here to rival ARM. But in response Intel snapped up Infineon's wireless division for $1.4bn in 2011 and has just signed a potentially game-changing deal with Google to supply chips for its Motorola handsets. Google has stated that Android devices will support Intel's x-86 architecture and be optimised for its chips.

So I have no doubts about Intel's product portfolio, which keeps it at the heart of the tech revolution. By upgrading to its productivity-enhancing chips, corporations can enable staff to work from home, speed-up decision making and even offer new services. In many cases the payback is in months rather than years.

Intel Corp (Nasdaq: INTC), rated OUTPERFORM by Robert Baird

Wall Street is forecasting 2012 turnover and underlying earnings per share (EPS) of $53.5bn and $2.14 respectively, climbing to $55.7bn and $2.20 in 2013. So I would value the stock on a ten-times earnings before interest, tax and amortisation (EBITA) multiple. Adjusted for the $2.8bn cash pile, that delivers an intrinsic worth of $31 per share.

There are a few pitfalls to watch. Being number one in its field means Intel can't entirely escape the vagaries of the economic cycle, especially if smartphones continue to eat into its bread-and-butter PC market. Rivals are also chasing hard, and for British investors there's foreign-currency risk to consider.

Nonetheless, the popularity of high-definition video and web 2.0 services won't diminish anytime soon, and there's also plenty of growth left in the server (data centre) market. Third-quarter results are due out on 16 October, while Robert Baird has a target price of $32.

Rating: BUY at $22.50

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more.