thinking about Intel (INTC)

I became interested in INTC in late 2011, when it was trading at under $20 a share and yielding well over 3%.  It was a good news/bad news story, where it seemed to me that only the bad news was reflected in the stock.  So, although I’m a growth investor (one might argue that because I’m a growth investor), I was attracted to the stock on value grounds.

The bad news then–and the continuing bad news today–was/is that INTC had missed the boat on processors for mobile devices.

The good news had two aspects:

–INTC had realized what a horrible blunder refusing Steve Jobs’ invitation to develop chips for the iPhone and was working to correct it.  In addition,

–INTC had a lead of a least a year, maybe two, over anyone else in cutting edge process technology (smaller, cooler, less power-hungry).  That advantage,INTC said, would quickly put it back into the mobile game–maybe as soon as 2012, certainly by 2013.

I reasoned that at 5x cash flow, 8x earnings, proprietary technology and a 3% yield, there was little downside.  So I bought some and began to write about the story.

The stock went to just above $28 a share within six months or so.  As the stock approached $25, however, I had to change my investment thesis to something more than “more bad stuff is unlikely, good things might happen, and I was being paid about a 30-year Treasury yield to wait.”

I thought $35 was a possibility if–as Paul Otellini the then-chairman said it would–INTC developed mobile customers quickly. At the same time, I recognized that if the company did not show mobile progress there was risk that the stock would reverse at least some of its gains.

Whoops!

A year later, the stock was at $19.10, below its year-earlier low.  Mr. Otellini, who by this time had announced that 2013 would join 2012 in the “nothing good to report” column, was out as CEO and the search was on for someone with a greater sense of urgency about INTC’s predicament.

déjå vu all over again

Brian Krzanich, a process engineer and a 30+-year INTC employee, is now the CEO.  The profit profile for this year and next–flat–hasn’t changed.   I can’t imagine the dividend being increased, although I can’t conceive of it being cut either over any reasonable investment horizon.  The next sea change in process technology is looking to be so expensive (triple the cost of the previous jump) that even INTC won’t go it alone–implying that INTC’s current edge in processing skill won’t last forever.

Nevertheless, INTC shares are trading above $28 again and flirting with the 2012 high.

Why?

Part of this is because the overall market is up sharply since 2012.  But INTC has been outperforming since shortly after Mr. Krzanich took the helm.  I think there’s good reason for this.  Mr.Krzanich is proving very nimble at using INTC’s technology to forge partnerships to get INTC the mobile knowhow and distribution it needs.

I think INTC is now in hands better suited to deal with INTC’s weakness in mobile. than it was in 2011, when I first bought the stock  There’s a considerable chance, I think, that INTC will make a successful transition to smartphone and tablet supplier, with profit increases to show for it in 2016.  $35 a share still sounds like a good price target to me.

Nevertheless, as was the case in early 2012, INTC is no longer the “no-brainer” it was in late 2012.  I’ve just sold about 20% of what I bought under $20 and I’ll likely trim a bit more.

 

 

 

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