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A Rosy Outlook for Intel

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The semiconductor industry appears poised for growth.

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Is Intel (INTC) ready to profit from a recovery in PC sales as the economy rebounds?

Tristan Gerra, an analyst at Robert W. Baird, believes it is. This morning, he raised his rating on Intel's stock to "outperform" from "neutral" and boosted the price target to $26 a share from $24. He called Intel's valuation "compelling" because the stock trades at less than 13 times his 2010 earnings estimate of $1.60 a share.

"Windows 7 should act as a catalyst for corporate PCs, while 2010 PC growth should benefit from easy comparison versus (the first half of 2009)," the analyst said in a research report. "A rebound in corporate orders including servers should help Intel's mix this year. The PC supply chain has the lowest inventory levels of all key semiconductor end-markets, based on our recent supply chain inventory analysis."

Gerra expects Intel's 2010 revenue to increase 15% following two consecutive years of declines.

In mid-day trading Monday, Intel's shares rose by nearly 3%, to $20.97.

Intel's antitrust settlement with Advanced Micro Devices (AMD), announced in November, will be "incrementally negative for Intel." But Gerra noted in a prior report, "While reducing the risk of additional antitrust lawsuits for Intel, it potentially reduces the defensibility of Intel's market share going forward and potentially levels the competitive landscape with AMD, in our view."

AMD agreed to drop all pending lawsuits, including a case filed in 2005, and withdraw all its regulatory complaints worldwide. This should save the companies millions of dollars in legal fees. In November, pressure on Intel increased after New York Attorney General Andrew Cuomo alleged that Intel paid Dell (DELL) and Hewlett-Packard (HPQ) in an effort to dissuade them from using AMD's chips. As part of the settlement, the chipmakers agreed to cross-license their technology, making it easier for PC manufacturers to make computers based on both companies' chips.

In December, the Federal Trade Commission charged Intel with manipulation of the market for graphics processing units that handle video and other images. Prior to the FTC's lawsuit, Intel had faced antitrust allegations related to central processing units, or the "brains" of personal computers. Intel grabs about 80% of the CPU market with AMD holding just about all of the remainder. Intel holds about 50% of the graphics market, but rivals such as Nvidia (NVDA) and AMD's ATI division dominate the market for standalone graphics chips. Intel's graphics are included in chipsets that connect the main processor to a computer's other functions.

In a related move of interest to semiconductor investors, Apple's (AAPL) shares rose $3.15, or 1.5%, to $213.88 a share on chatter that the company may soon release a tablet version of the Mac. (See, Apple Tablet Faces Uphill Battle.)

The Semiconductor Industry Association, a trade group based in San Jose, California, says chip sales posted a year-over-year gain in November, the first such increase since September 2008. Last year, the recession began eroding demand for personal computers and consumer electronics.

Worldwide sales of semiconductors rose to $22.6 billion in November, 8.5% higher than November 2008 when sales totaled $20.9 billion.
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No positions in stocks mentioned.
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