The shift in consumer patterns away from PCs and towards smartphones and tablets has been a big trend in the last few years. While Intel Corporation (NASDAQ:INTC) hasn’t been hit nearly as hard as fellow chipmaker Advanced Micro Devices, Inc. (NYSE:AMD), the stock is still down 16% in the last year- which is roughly the rate at which earnings declined in the third quarter compared to the same period in 2011. The 10-Q for the third quarter of the year also disclosed a 5% decrease in net revenue, after Intel had managed to increase its sales in the first half of 2012. It’s possible that this was just the result of random fluctuations, but given the industry’s troubles it seems more likely to be a pattern that will continue in the future. If there was a bright side to the quarterly report, it was that only about half of the drop in Intel’s pretax income was due to poorer business conditions. Just as important a culprit was a large increase in research and development expenses; arguably, these might be considered investments rather than costs.
Intel’s troubles didn’t keep it off our list of the ten most popular tech stocks among hedge funds for the third quarter of the year, as 44 funds and other notable investors in our database of 13F filings reported a position. See more tech stocks hedge funds are crazy about. Billionaire Ken Fisher’s Fisher Asset Management owned a little over 19 million shares of the stock (check out Fisher’s stock picks). Renaissance Technologies, whose founder Jim Simons has become a multibillionaire, had Intel Corporation as one of the five largest positions by market value in its portfolio (find Renaissance’s favorite stocks). AQR Management, managed by Cliff Asness, was also buying the stock during the quarter.
Intel Corporation currently trades at 9 times trailing earnings, but even sell-side analysts are convinced that the company will fail to maintain its current business in 2013. Consensus earnings per share are $1.94, while $2.11 is expected for 2012; this implies a forward P/E of 11. Intel increased its dividend payment last summer, and the yield is currently 4.4%; that’s quite high for a technology company, and for income investors it may overcome concerns about the business, but at 11 times earnings we would want to see at least some earnings growth and we’re worries that Intel may not be able to deliver.
AMD, the closest peer for Intel, is unprofitable on a trailing basis and net losses are expected next year as well. With revenue down 25% last quarter versus a year earlier, it’s not surprising that the market has driven the stock price down 54%. We definitely don’t think that AMD is a buy; anyone who expects the industry to recover is better off buying Intel.
Texas Instruments Incorporated (NASDAQ:TXN), STMicroelectronics N.V. (NYSE:STM), and Maxim Integrated Products Inc. (NASDAQ:MXIM) are three additional comparable companies. STMicroelectronics is also looking at finishing 2012 in the red, and the stock trades at 31 times forward earnings estimates. It also pays a high dividend yield, but revenue is down and we don’t think that it’s a safe enough stock for an income investor. Texas Instruments and Maxim have trailing P/E multiples in the 20-24 range; this is, of course, a sizable premium to Intel though revenue was only down 2% at each of these companies compared to the third quarter of 2011. Texas Instruments actually had its net income come in higher. The sell-side expects earnings growth at these companies in 2013. We’d be skeptical that these peers can do that much better than Intel, and their multiples are high, so it may be best to avoid these stocks as well.
We’re not confident enough in the industry to buy Intel right now, but it could be worth watching for future developments. Its P/E multiples are low enough that it could be a good value if it holds its earnings steady, and the stock certainly should be revisited after its next quarterly report.