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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


July 20th 2012 Intel
Nasdaq Symbol: INTC
Industry: Chipmaker
Price as of 7/20: $25.56

Low expectations heading into earning season allowed the major averages to rebound over the last week. Many of the industrial, energy, and material stocks are either missing estimates or lowering guidance, but the stocks are holding up as most of the weakness has been priced into the stocks. However that doesn't mean they won't go lower if the major averages pull back once again. The financials are succumbing to profit-taking following in line or modestly better than expected earnings. JP Morgan has pullback to where it stood before releasing earnings. The one sector that seems to be getting a bounce following earnings is technology. IBM jumped 4% following earnings, Google jumped 3%, while Sandisk rose 12%. This week we'll highlight another blue chip tech that rose following better than expected earnings. The stock of the week is Intel. Intel continues to dominate their industry while also trying to expand into faster growing sectors like tablets and smartphones yet Wall Street doesn't give the stock much respect. Currently the stock only trades for 10 times earnings with a dividend yield over 3%. Investors looking for a blue chip tech in this market may want to take a look at Intel.

The California-based chipmaker earned $2.8 billion, or 54 cents per share, in the second quarter, compared to $2.95 billion, or 54 cents per share, in the same period a year ago. The company easily beat estimates. Revenue hit $13.5 billion for the quarter, slightly under analysts' consensus estimate of $13.56 billion and up from $13 billion a year ago. Breaking down the sectors, the PC Client Group generated revenue of $8.7 billion, up 3% from the first quarter and up 4% from last year. The Data Center Group or clouding computing sector generated revenue of $2.8 billion, up 14% from the first quarter and up 15% from last year. Looking forward, Intel cut guidance in large part to weak macro environment. It is especially interesting to note Paul Otellini's comments about weakness in China, which confirms some of the recent economic data points from China. Also inventory, which ended the quarter at $4.9 billion, up 9% sequentially and 22% year over year, was up more than expected due to a faster ramp in Ivy Bridge chip production for ultra and notebooks. In 2012 Intel doesn't expect substantial sales numbers from tablets and smartphones. They still consider tablets as an incremental device which is disappointing. In the near future, the company expects a slow ramp up in this segment. Nevertheless they are prepared for designs based on Windows 8 and Android. Speaking of Windows 8, for the third quarter, the CEO doesn't expect a slowdown in sales ahead of the launch of the new operating software since most systems sold now come with coupons which allow customers to upgrade very cost efficiently if they choose to do so.

All in all not a spectacular quarter, but business remains solid. At the end of the second quarter, Intel had approximately $13.5 billion in cash, equivalents and short term investments, while operating with roughly $7 billion in long term debt, for a net cash position or $6-$7 billion. Currently, the company has $7.5 billion of repurchases under authorization for the coming quarters. As mentioned, Intel's valuation remains compelling. Currently, the stock trades for 10 times earnings, 2.4 times sales, 2.6 times book value, and boosts one of the best dividend yields in the tech sector. The dividend yield so provide support for the stock particularly since the stock will go ex-dividend in the coming weeks. Long term Intel remains well positioned to continue to expand, buy back their stock, and hike their dividend.