It’s Time To Buy Some Intel (NASDAQ:INTC)

Intel Has Problems, But Cash And Dividends Aren’t One.

Intel (NASDAQ:INTC) has been having a hard go of it for the last few years. Changes within the industry, oversupply, and a failure to address those issues have weighed heavily on the growth outlook. I’m not here to tell anyone any of that has changed because I don’t it has. What I am here to do today is to tell you that this is still a good stock. It’s also a deep value compared to the broad market. And it pays a very healthy and stable dividend that comes with no small expectation of increase. So, yes, Intel has its problems, but its attractiveness as an income investment isn’t one of them.

Intel’s Q3 Earnings Report Leaves A Lot To Be Desired

Intel’s Q3 earnings report wasn’t all that bad, but it wasn’t was excellent. In an age of COVID-accelerated demand, simply meeting tepid expectations isn’t enough, not by a long-shot. On the top-line, the revenue of $18.3 billion is down -4.7% from last year but beat consensus by $0.04 or about 0.20%. Data-centric demand was down a net 10% due to a 47% contraction of enterprise and government spending on a segment basis. Within that, the Data Center Group (one of Intel’s best growth markets) fell -7.0% while the cloud increased by 15% and pc-centric by 1.0%.

"Our teams delivered solid third-quarter results that exceeded our expectations despite pandemic-related impacts in significant portions of the business,” said Bob Swan, Intel CEO. “Nine months into 2020, we’re forecasting growth and another record year, even as we manage through massive demand shifts and economic uncertainty. We remain confident in our strategy and the long-term value we’ll create as we deliver leadership products and aim to win a share in a diversified market fueled by data and the rise of AI, 5G networks and edge computing.”

Moving down, the gross margins shrank to 54.8% but beat consensus by a hair. The bad news is that adjusted EPS is only in-line with expectations, while GAAP earnings are missed by $0.02. Looking forward, the company restated its guidance for the year, raising the revenue forecast by $0.3 billion or .4% and EPS target to a range of $4.90 to $4.95 or $0.35 above the consensus.

The Downgrades Are Already Rolling In

Bank Of America is the first to issue commentary on Intel’s 3rd quarter report, and with comes a downgrade. The analyst at BoA lowered the rating to Underperform from Neutral and reduced the price target to a mere $45. According to her, Intel faces headwinds and competition that will hamper its growth in the coming years. The stock is still solid in terms of its balance sheet and portfolio breadth, but there are better growth-stories in the industry. The three structural issues she identified are 1) Intel’s lack of a plan to fix manufacturing challenges with the next-gen 2) the market is moving away from Intel’s most profitable segments and 3) there is growing competition from niche makers like Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD).

Intel’s Dividend Is Worth A Look

Intel may not pay the highest dividend in the chip-maker/memory industry, but it is among the safest. The 2.5% yield is backed up by a 27% payout ratio and a solid balance sheet. The company has ample cash for operations and dividends, very low debt, high coverage, and plenty of free cash flow. Intel may not have a strong growth outlook when it comes to earnings, but there is no reason to think it will stop paying or even cut the distribution, and there is every reason to expect a future increase.

The Technical Outlook: Intel Is Trading At Rock Bottom Prices

I’m not one to try and call a bottom (yes, I am), but it looks like Intel is trading near rock-bottom. Intel is only trading about 10X its earnings in terms of valuation, which makes it half as expensive as the broad market and a deep, deep value compared to Nvidia and AMD. On a technical basis, the stock is trading near the 8-month low, which is itself not-too-far above the long-term multi-year low. That low has provided support nearly a dozen times. If support doesn’t hold up at the $48 level, the next target is near $44.