There's Life In An Old Tech Stock (INTC)

Intel (INTC), one of the largest semiconductor chip manufacturers, has fallen mightily since its headier times in 2000.

The stock price has fallen from over $75 to just over $21 currently. Its valuations are now much more attractive, as the price has fallen but INTC has maintained its leadership role in chips.

Despite falling revenues and pricing pressures, the company has a solid balance, which gives it the flexibility that many of its competitors do not have. It's that strength and current valuation that has given new life to a stock that had flat-lined for several years.

Intel is the largest semiconductor chip manufacturer that designs and fabricates a variety of products. Its Digital Enterprise Group accounts for approximately 65% of the company's revenues.

Over 80% of INTC's sales are outside of the United States. The majority of the manufacturing is done in Intel-owned and operated plants.

INTC reported what was perceived as disappointing results for the third quarter of fiscal year 2006 ending in September.

Top-line revenue fell, despite record shipments of mobile and computer server chips. Gross margins tumbled 11 percentage points as INTC wrote-off approximately $100 million of older processors. Operating income fell 35%.

Drilling down on these numbers, however, one discovers that the decline in revenue was due primarily to pricing declines as INTC moved to regain market share from AMD. Typically, price wars do not generate lasting market share, however INTC did demonstrate the financial resources that can and will be used to maintain INTC's dominant position.

INTC did provide positive guidance for the 4th quarter. INTC expects revenues to be in the $9.1-9.7 billion range in the fourth quarter, a 4.5-11.5% increase. Gross margins will be in the mid-50's, SG&A and R&D will be in the mid-teens (as a percent of sales). This will bring operating margins to the mid-20 range. These are not to the levels of the mid-90's, but they are 2-3 times higher than the post bubble crash. In addition to new products, INTC is seeing higher than normal seasonal sales driven by the demand being generated by the telecom sector.


INTC's balance sheet is among the strongest in the tech sector, and this allows Intel enormous flexibility. It's debt/equity ratio is about 0.064%, while it maintains over $7 billion in cash on it's balance sheet. As well, Intel generates an enormous amount of free cash flow (after it's heavy spending on R&D and capex). As investment opportunities arise, Intel will have the financial flexibility to acquire attractive companies that will provide future growth.

Even as INTC has struggled in the past few quarters, it has earned a return on equity of over 16%, in excess of its cost of capital. The stock has fallen from a high of over $75 in 2000 to currently around $21. The stock seems to have found support at around $20. The current growth prospects, leading market share position and balance sheet strength makes this company an attractive buy at these current levels. INTC may show investors that there is some life left in old tech stocks.