Share tip of the week: time to buy this chip-maker’s plummeting shares

Intel, the world’s biggest computer-chip maker, has seen its stock pummelled by the fallout from the credit-quake. Yet with around a 75% share of the $30bn-a-year global microprocessor market, I believe this is unjustified. Here’s why.

Intel (NYSE:INTC) , rated a BUY by Piper Jaffray

Firstly, in a cost-cutting environment, Intel – whose products are used in PCs and other productivity-boosting tools – should be partly insulated from the worst of any recession. By upgrading IT hardware, businesses can enable staff to work from cheaper locations (such as their homes), and can also take advantage of economies of scale, improve decision making and launch new services. In many cases the payback is felt within months, rather than years.

Secondly, the rapid take-up of high-definition video and web 2.0 services won’t stop because of recession. Expansion may slow, but this trend will still act as a substantial tailwind to key players like Intel. In fact, the firm has recently launched an assault on the embedded chip sector (which is worth around $10bn a year), setting its sights on selling top-end processors that will power new kinds of devices, such as industrial robotics, in-car information and entainment systems and set-top boxes.

Meanwhile, at the other end of the food chain, the group also sees huge opportunities for its new Atom processor for low-end “netbooks”. The board first thought that these cheap devices would only sell in emerging markets, but has since enjoyed strong demand in the developed world for families looking for extra machines. These low-priced chips may cannibalise more profitable products and hit average selling prices, but overall earnings should keep moving forward because the volumes are just staggering.

Next, any severe slump would probably hasten industry consolidation. Businesses such as Intel that have mountains of cash (it has net funds of $6.3bn as at June), should be able to out-maneouvre their smaller, less well-funded rivals.

Wall Street expects 2008 turnover and underlying earnings per share (EPS) of $40.3bn and $1.26, rising to $42.5bn and $1.45 respectively in 2009. That puts the stock on an attractive 2009 p/e ratio of 12.1 and paying a 3.5% dividend yield, which looks fartoo miserly for such an industry heavyweight.

Fine so far, but what are the possible pitfalls? Well, as the number-one player, Intel can’t escape the economic cycle entirely. Also its rivals (such as Advanced Micro Devices) are ramping up product development and Intel itself is being investigated by the competition authorities about alleged unfair selling practices.

Finally, Intel has invested substantial funds in developing its new 4G WiMax platform (offering 14Mb/s wireless broadband). Only time will tell whether this technology will generate an acceptable return.

Even so, in these volatile times, Intel has a rock-solid balance sheet, top-notch technology, enjoys strong market positions and is trading at five-year lows. Third-quarter results are due out on Tuesday 14 October.

Recommendation: BUY at $16.07 (market capitalisation $90bn)

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.

 

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