Intel shows the way
The economy continues to take baby steps toward recovery with unemployment still high and retail sales in December a bit weaker than originally reported. There are areas of emerging strength, particularly in technology, which I expect to be a rewarding sector in 2010. Interest rates remain low and easy earnings comparisons with the ghastly prior December 2008 quarterly “performance” will boost companies that are moving back faster than the common herd.
Intel (INTC-$21) is the first big star. It reported earnings that knocked analyst forecasts out of the park. Sales were up 28%, profit margins increased and operating income more than doubled. Over 80% of the world’s computers run on Intel chips Two years ago, just before the Recession began, the company’s committed billions of dollars in investments into developing innovative new chips.
Its sales growth in the December quarter was almost entirely from consumers as businesses with less forward-looking managers than Intel remain hesitant to invest in new technology. That will change later this year under the spur of competitive pressures and increasing business sales will add to Intel’s earnings momentum, aided by companies adopting the latest Microsoft Windows system, which surprisingly seems to work.
On current estimates, Intel’s forward P/E ratio is an attractive 13, less than the forward P/E on the whole S&P 500. It has almost no debt and a 2.7% yield from a frequently raised dividend. It’s one of my top tech picks for 2010.
Intel makes occasional headlines with antitrust complaints filed by the Federal Trade Commission and similar bodies in Europe. Ethics aside, such complaints usually are something like curtain calls for achieving a dominant industry position. IBM (IBM-$142), another top tech pick, was investigated for years until the changing world of technology led the Justice Department to drop the case.
In the 1950’s, General Motors (no symbol-bankrupt), was a perennial subject of antitrust inquiries due to its dominant industry position. It dissolved this dominance through decades of overly comfortable management, culminating in the recent resignation of Mr. Wagoner by request of the federal government concurrent with it putting $50 billion into GM.
Mr. Wagoner’s departure after ten years at GM surprised the auto industry although the company lost $85 billion on his watch. GM is making some appealing cars now and its emergence from bankruptcy freed of a huge debt burden holds hope. Success is badly needed as the jobless rate in Michigan is 15%.
Ford is also selling attractive new models and turned a profit in the third quarter, helped by the “cash for clunkers” program. Chrysler, now 20% owned by Fiat, has no new models and remains an enigma, conceivably leading to the introduction of a Chrysler Enigma.
Chrysler is privately held but Ford (F-$12) avoided bankruptcy and its stock has had a good run, up from less than $2 a year ago. That’s nice to see but earnings estimates for all of 2010 are for around $.50 a share. Its stock has a forward P/E of 24 and it’s hard to think of a good reason why anyone outside the Ford family wouldn’t prefer to own stock in more reasonably valued and dividend-paying Intel.
One reason is product recognition that makes it easier for a broker to persuade a customer to buy stock in Ford rather than in a faster growing but less known company like Cognizant Technology (CTSH-$48), another of my top tech picks.
Automobiles will always be among the more glamorous industries and this attraction has led ego-driven entrepreneurs to build auto plants in 20 different countries, creating a permanent oversupply condition. China, now the world’s largest car market in units, has over 40 automakers. This is a highly competitive sector and I think most investors can do better sticking with dominant innovative companies like Intel.