Intel Into Earnings Is a Strong Buy

Intel Earnings Beat, but Outlook Is Light

Buy-and-hold investors have crushed it with Intel. Granted, if you bought during the dot-com bubble during 2000, your portfolio may still be upside down, but maybe not depending on your use of option hedging and dividend reinvestment strategies.

Investors from $28+ in 2012 are enjoying a fat and rising dividend, while waiting for capital gains. For investors considering adding more shares or entering a new position, right now is an exciting time.

The earnings release is this week, and you can exploit elevated option premium to enhance your entry while at the same time lowering your risk.

First, let's look at what we are expecting with earnings, then the competitive landscape and finally, ideas on maximizing your edge.

Background: Intel designs, manufactures and sells integrated digital technology platforms primarily in the Asia-Pacific, the Americas, Europe, and Japan.

52-Week Range: $19.23 to $29.27
Price-to-Book: 2.2

Intel is forecast to record lower fourth-quarter earnings after the market closes on Jan. 17.

The consensus estimate is currently 45 cents a share, a drop of 19 cents (29.7 percent) from 64 cents during the equivalent quarter last year. Estimates from analysts range from a low of 36 cents per share, up to the highest estimate of 50 cents per share. Expected revenue and earnings pressure is the primary catalyst causing the share price to fall out of bed during in the second half of 2012.

Twenty-six out of 49 analysts covering Intel now rate the company a hold, while 16 recommend buying and seven recommend selling.

Seven out of 49 analysts now rate Intel a strong buy down from eight analysts a month ago. Analysts are increasingly negative; the number of analysts issuing a sell recommendation compared to a month ago has increased.

Based on the last month price action, the analysts that downgraded Intel couldn't have timed it more wrong.

Investing rule: Never blindly, in isolation, follow analysts. They often upgrade at peaks, and downgrade at bottoms. They are human, too.

The daily 200-period moving average is falling, a technical bearish indication, however, on the weekly chart, the 200-period moving average continues to remain bullish.

For long-term buy-and-hold investors, the dividend is king. Intel is dividend royalty and currently offers a 4.2 percent yield. A large yield doesn't impress me when the dividend is at risk of vanishing, but even if Intel's profits are in line with estimates, the payout ratio is under 50 percent.

I don't know if Intel will beat this report's average estimate, but the smallest beat in the last four quarters was 3.8 percent. Will Intel beat every quarter in the future? Probably not, but the dividend appears solid. The average analyst target price for Intel is $23.05.

Short sellers are among the brightest and most informed market participants, and if they turn sour on a company it is likely for a valid reason. If the short interest ascends above 5 percent, you may want to scrutinize changes within the space. Otherwise, the prevailing 4.6 percent of the float short is relatively meager and not a major concern.

Intel's competition comes from Advanced Micro Devices, Nvidia, Qualcomm, Texas Instruments, Seagate, and Western Digital.

Seagate and Western Digital may not come to mind first as competitors, but don't discount the storage space. Intel produces consumer and enterprise level solid state storage devices. As storage chip prices continue to fall, solid state storage will take market share away from mechanical storage.

I am very bullish on Seagate and have written about Seagate many times in 2012.

AMD is the first company I think of as the main competitor of Intel, and between the two, I like Intel better. I still like AMD, but dollar for dollar, Intel is a better buy at the current share price level. When share prices fall much under $5, their price/value is often skewed due to market sentiment.

As the mobile space grows, some analysts believe Nvidia, Qualcomm and TI will continue taking processing market share at the expense of Intel and AMD. I see that as a shorter-term trend and expect Intel (and AMD) to make significant gains soon. To believe otherwise requires a theory that Intel is simply going to throw its hands in the air and scream surrender.

Don't count on Intel missing the second act of this show or giving up in the mobile space. They have everything they need to take on Nvidia in both central processing and graphics processing. That's my case for Intel remaining attractive; here are ways to time the upcoming earnings.

The easiest way is to wait. Boring yes I know, but if you're not comfortable running across a busy street, don't force it. The mark of a true pro is the ability to do nothing when everyone else can't wait.

If you're ready to buy, you might as well let options work in your favor. Intel options typically rise immediately before earnings. The February $22 strike put options will probably sell for about 85 cents above intrinsic value based on a share price of $22.

If you sell the puts and Intel falls after the earnings release, you still make money as long as the options expire with Intel trading above $21.15 a share. You will have a choice to keep the shares with an effective cost basis of $21.15 or sell them. It's a great way to get a discount if you're going to buy shares either way.

If Intel's shares increase after the earnings, this is still a winning trade relative to buying the stock all the way up to $22.86 or more. Above $22.85 you begin to lose possible capital gains, but you still make almost 4 percent in about one month (or less).

The most important reason to use options in my opinion is they allow you to lower your risk. Selling a $22 strike put lowers the amount an investor can lose to $21.15. Managing risk is the key to long-term profits.

By Contributor Robert Weinstein

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At the time of publication, Robert Weinstein was long INTC.