This Well-Known Blue Chip Has 40% Upside — It’s Time to Buy

During their baby phase, investors are totally in love with them. The newborn is absolutely perfect and the stockholders will coo and brag, and throw money at their pride and joy regardless of price. During the toddler phase, although the company may display poor behavior in not doing what it’s told and destroying everything in its path, including shareholder wealth, investors are still convinced they’ve got a real long-term winner. They forgive and shrug this phase off as just a part of growing up.

As the company hits the elementary and middle school years, investors are still supportive — although not as forgiving as in the toddler years. Poor performance doesn’t go unpunished and the severity increases as the years progress. By the tumultuous high school and slacker college years, investors, like parents, often throw up their hands in frustration. The stock apparently can’t figure out what it wants to be or which direction its going. Sometimes, after this turbulent period, something wonderful often happens, but unfortunately many investors have lost patience and miss the metamorphosis. By this time, the company has grown into a mature, consistent, responsible adult.

Giant chip maker Intel (Nasdaq: INTC) fits that profile. In fact, if Intel were a late 20- or early 30-something, then you would comment on what a nice, young person they were.

[ad#Google Adsense]No self-respecting investor had an account that didn’t include shares of Intel during the full tilt boogie of the tech bubble. It was usually paired with Microsoft (Nasdaq: MSFT) and/or Cisco (Nasdaq: CSCO). As that mania played itself out, the whole crowd broke bad and, unfortunately, Intel happened to be running with it. At its adolescent peak in 2000, shares were priced more than $66 a share. Today, shares trade for less than a third of that. Is there a reason other than parental frustration?

All grown up, with a rising dividend and cash in the bank
So while some of its peers have succeeded less and wallowed in their former 1990s glory, Intel has grown up in a big way. With a market cap of more than $120 billion, Intel is hands-down the world’s largest supplier of semiconductors, with brand recognition that puts the company on equal footing with the likes of Coca Cola (NYSE: KO), McDonald’s (NYSE: MCD) and other commercial U.S. icons. The stock’s valuation matches the mature image, with a trailing price-to-earnings (P/E) ratio of 9.5, a debt-to-capitalization of 4%, a 3.7% dividend (which was recently bumped up 15% from the fourth quarter of 2010) and a dividend payout ratio of 33%.

The company also manages its finances like an adult. Analysts project it can generate $7.5 billion in free cash flow after its commitment to capital spending of nearly $9 billion. Maybe I’m an optimist, but I have to think that if a company invests $9 billion into the business and executes well, then something good is going to happen. And when all is said and done, Intel could still have $14 billion in cash on the balance sheet. No need to borrow from Mom and Dad.

But perhaps the most grown up move Intel has made lately was the McAfee acquisition in August 2010. As the computing business moves further from the desktop and into the cloud (via the Internet), the role of hardware will change dramatically. Sure, there will always be a need for microprocessors. They’re an essential piece of hardware to all computing. But going forward, computing will be more web/network-centric than PC-centric. Security software is to the Internet what a lock is to a front door. Intel understood this. They had the cash. They bought smart. They adapted.

The McAfee purchase gives Intel a strong foothold in software. This complements the lion’s share of the business, the enterprise hardware market, which accounts for 60% of revenue.

Action To Take –> From a snarly, tech teenager to well-adjusted, successful, grown up business, Intel is delivering superior shareholder value through rising dividends and share repurchases (the company is currently in the process of buying back $14.2 billion of its stock) — along with prudent financial management.

Its dominant market share positions the company for growth as information technology spending rebounds, and its intelligent approach to acquisitions will only strengthen that position. With a single digit P/E and an above-average dividend yield, Intel shares offer the potential growth of a teenager at the value price of a 30- or 40-something. Shares currently trade just shy of $20. A 12-month price target of $27 is justified based on P/E growth to 15 times projected 2011 earnings per share (EPS) of $2.15 and the company’s strong cash position. Factoring in the dividend, that’s a potential total return of about 40%.

— Adam Fischbaum

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Source:  StreetAuthority