Intel Corporation (INTC) 2013’s Outlook Underrated: Wells Fargo

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Intel Corporation (NASDAQ:INTC)’s 2013 is likely to be better than most investors perceive. According to Wells Fargo & Company (NYSE:WFC) analyst, David Wong, CFA, PhD. The world’s leading chip maker faces an uphill task of cementing its position as the market leader in its industry as competition continues to mount from smart devices memory chip maker, QUALCOMM, Inc. (NASDAQ:QCOM).

Intel Corporation (INTC) 2013's Outlook Underrated: Wells Fargo

The Semiconductor industry remains attractive as companies continue to venture into what seems to be the new phase in the technology industry. Intel Corporation (NASDAQ:INTC)’s strength lies with the PCs and computer server industry, which is currently being cannibalized by the mobile computing industry (notebooks, tablets and smartphones).

In a report published Monday, Wells Fargo & Company (NYSE:WFC) analysts revised upwards their earnings estimates for the company, highlighting server market potential; Intel’s venture into the smartphones and tablets industry, and high levels of annual revenue to finance R&D, among others.

In the report, the analysts wrote, “We think secular themes such as cloud computing and data traffic created by mobile computing could drive x86 server-related processor growth in the mid-teens percentage range over the next several years. In our view, Intel’s Atom platform provides an opportunity to gain market share in the smartphone and tablet markets. Intel typically leads other advanced logic manufacturers by 1-3 years in linewidth transitions. Intel’s stock multiple remains suppressed despite record margins in 2010, with a forward P/E of 10-11x”.

The analysts outlook of the company’s server market potential is impressive. According to reports, the insurgence of mobile computing could foster growth in the cloud computing and data traffic, which could drive server related processor growth 86x. While mobile computing is expected to deter growth in the PC industry, which in turn would be affecting PC processor related business, there is a positive impact on cloud computing and data traffic and server processor business.

The analysts also think that investors might be underrating the company’s potential, in growing client processor business in 2013. The company’s client segment sales grew by 17 percent in the year 2011, year-over-year. This was way above the global Integrated Circuit (IC) market which fell by a flattish one percent. Analysts expect the company to maintain its above industry client growth rate in 2012 and predict a long-term semiconductor growth rate of between 10-12 percent annually.

Intel Corporation (NASDAQ:INTC) is also looking to make giant steps in the smartphones and tablets industry with its Atom roadmap. The company is trying to leverage slowdown in PC industry with the rapidly growing mobile computing industry. The company could benefit immensely depending on the success of Windows 8 platform. The analysts wrote, “as Intel accelerates its Atom roadmap, we believe that Intel processors for smartphones and tablets may come to surpass their ARM counterparts in terms of both performance and power consumption. We believe that Intel could become a significant presence in the tablet space as Windows 8 tablet sales gain momentum”. The analysts expect Intel to add to smartphone design wins in 2013.

According to reports, analysts also believe that Intel still dominates the chip manufacturing and technology industry. The company has dominated the manufacturing technology over the last 1-3 years in its linewidth transitions, and as much as 3-5 years in migrating to new transistor structures. The company’s $50+ billion revenue a year is a massive advantage over its rivals as far as R&D is concerned going forward.

Additionally, Intel’s stock multiple remains suppressed despite new heights in margins and EPS. The analysts expect the company to maintain a gross margin of between 60-70 percent. The company had already shown glimpses of maintaining this level of margins, for instance, in 2010 when it reported GAAP gross margin of 67 percent and GAAP operating margin of 37 percent.

Currently, the company boasts a trailing 12-month operating margin of ~30 percent. This is way above an industry average of 8 percent. Texas Instruments Incorporated (NASDAQ:TXN) comes close with 23 percent. The trailing 12-month operating margin rate is well within Wells Fargo analysts’ prediction of between 29-40 percent, expected over the next foreseeable future.

The analysts also expect the company’s share price to rally to the point where its price to earnings ratio is well within the industry average. The analysts noted that the company P/E ratio has dropped to between 10-11x, as compared to other mid and large cap chip companies whose P/E ratios oscillate in the mid-upper teens.

The company also boast an impressive dividend yield of over 4 percent, which the analysts conclude is well above a majority of the amount paid by chip companies. Notably, in the last eight years Intel has raised dividend almost every year, increasing the dividend twice in some years. In the last 20 years, Intel has never reduced its dividend payment.

At the time of this writing, Intel Corporation (NASDAQ:INTC) stock was trading at $20.35 per share, up $0.12, or 0.61 percent decline from the previous close.

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