Investing

Intel shares to surge more than 30% as chipmaker’s profitability rises, analyst predicts

Key Points
  • BMO Capital Markets raises its rating for Intel shares to outperform from market perform, predicting the company will report higher operating profit margins.
  • "While Intel has historically traded at below a market multiple, we believe if the company can start to demonstrate leverage in its financial model, we see the stock trading closer to a market multiple," the firm's analyst writes.
Analyst: Intel shares to surge more than 30%
VIDEO0:4200:42
Analyst: Intel shares to surge more than 30%

Intel shares will rise due to a cost cutting and a more reserved acquisition strategy, according to one Wall Street firm.

BMO Capital Markets raised its rating for Intel shares to outperform from market perform, predicting the company will generate higher profitability next year.

The company's shares are down slightly Monday afternoon despite the report.

"The single biggest reason for our change in thinking is our belief that Intel is finally addressing a facet of the business model/operating model that we have struggled with, i.e., lack of financial discipline, whether it comes to capital allocation, making acquisitions that have made little sense at least to us over the years, or simply keeping its operating model in check," analyst Ambrish Srivastava wrote in a note to clients Monday. "We find the stock attractively valued vs. our group, as well as more broadly."

Srivastava raised his price target to $58 from $37, representing 31 percent upside to Friday's close.

The analyst predicts the company's operating profit margin will increase to 29.2 percent next year from an estimated 28 percent this year.

He also noted that Intel shares are valued at 7 percent discount to its industry peers on a free cash flow multiple basis. In addition, the chipmaker is trading at 12 times the firm's 2019 earnings per share estimate versus the 16 times multiple for the S&P 500 for that year.

"While INTC has historically traded at below a market multiple, we believe if the company can start to demonstrate leverage in its financial model, we see the stock trading closer to a market multiple on CY19 EPS of $3.65, which reflects the inherent earnings potential in the model," he wrote.

Intel's stock is up 22 percent year to date through Friday compared with the S&P 500's 15 percent gain.

— CNBC's Michael Bloom contributed to this story.

Disclaimer