NEW YORK (TheStreet) —Intel (INTC – Get Report), the world’s largest semiconductor company, will report second-quarter earnings results Wednesday after the closing bell. Despite the projected decline in Intel’s profits, investors should buy this broken stock — not broken company — which pays a solid, 24-cent quarterly dividend that yields 3.1% annually.
Slumping PC demand remains a concern for Intel, whose shares are down more than 19% on the year, making it the worst-performing equity in the Dow Jones Industrial Average (DOW). And it would seem Intel’s prospects have worsened, given the gloomy outlook from rival Advanced Micro Devices (AMD). But there’s no news here. Intel’s PC struggles have been an issue for some time.
This hasn’t stopped analysts from cutting estimates. In the past seven days, the average earnings-per-share estimate for Intel for the quarter just ended has slid 2%.
For the quarter that ended in June, the average analyst expects Intel to earn 51 cents a share on revenue of $13.15 billion, translating to year-over-year declines of 7% and 5%, respectively. For the full year, earnings are projected to fall 7% to $2.14 a share, while revenue of $55.19 billion implies a decline of 1% from the previous year.
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These numbers reflect the struggles Intel has faced to increase revenue amiddeclining PC sales. What’s more important to focus on, however, is how the California-based company plans to boost revenue and profits and return value to shareholders in the quarters and years ahead.
In that regard, management is executing in a direction that suggests Intel will become less dependent on PCs sooner rather than later.
While revenue from its PC-related business still accounts for 50% of its annual sales, that’s down 30 percentage points from where its PC-related business was three years ago, at 80% of revenue. The fast-growing, so-called Internet of Things (IoT) is now the new frontier for Intel. Its recent acquisition of Altera (ALTR), which has strong IoT capabilities, is one example.
So, while gloomy prospects for PCs may be a reason to avoid Intel, it remains encouraging that the company is clearing pathways for future growth. And at just 12 times earnings, it’s tough to ignore how cheap the stock has become, against a price/earnings ratio of 21 for the S&P 500 (SPX) index. From my vantage point, intel’s potential rewards outweigh the risks.
Plus, not only does Intel still enjoy a consensus “buy” rating, its average analyst 12-month price target is $36, suggesting gains of 22% from current levels of around $29. And while the recent decline in estimates for the just-ended quarter implies less confidence, it also lowers the bar for Intel to beat estimates Wednesday, making its stock a solid contrarian play.