The Tycoon Report

ANOTHER BRICK IN THE WALL: Time to Cash in on Chips?

Hey folks, how goes it?

I really love when an opportunity like this comes along. I have been watching a company for years -- Watching it grow, watching the money roll in, and watching its stock move higher. What I hated was the fact that the stock of this company was always out of my price range. But I’ve been patient, my friends -- What we can NEVER do as intelligent investors is chase a stock. No matter how strong a company is, if we can’t get it at a bargain price, we simply can’t buy it. But what I love is when one of these companies goes on sale -- and I’m not referring to being put up for sale in an acquisition -- I’m talking about the stock getting cheaper. It’s like walking into the grocery store and finding out that all of the items you want to buy are 50% off that day!

That’s exactly what happened last week when Intel’s stock (Nasdaq Symbol: INTC) dropped 15%. It’s as if a pitcher just threw me a slow ball right across the plate -- I’m ready to swing for the fences folks.

Let me give you the run down ...

Last week Intel announced 2005 Q4 earnings results. Due to some supply chain issues, Intel missed revenue projections by about $200 million (keep in mind this is on roughly $10.2 billion in revenue, so it’s not as if they lost money or are going out of business sometime in the near future). Somebody should’ve told investors that. The stock dropped almost 15% in one day, and the ride isn’t over yet. The stock has continued to fall a few points each day since.

Now the question we need to ask ourselves is this: Is there a fundamental problem with Intel’s business?

• Did this supply chain issue cause irreparable harm to Intel?
• Will all of Intel’s customers completely walk away from the company?

I don’t think so. Let me tell you why.

For starters, Intel has one of the best brands in the business -- many novice computer users I know will purchase a PC simply because it has the Intel logo on the outside of the box, so they knew “it was a good quality machine.” Intel is also the strongest player in the industry from a financial perspective. The company gets over 20% Returns on Equity on the average, and its margins are always in the double digits. And even though they “missed” earnings -- meaning they didn’t earn exactly what they TOLD analysts they would probably earn -- they still grew their profits by roughly 16% from the same period last year, and showed more than 20% growth from the previous quarter.

That aside, it was only a couple of weeks ago when Apple announced they would begin selling iMacs powered by Intel chips. This was a HUGE occasion for Intel, considering Apple’s computer sales have been better than ever due to the recent success of the iPod. So other than a minor revenue shortfall, and one of Intel’s customers getting some chips from AMD in the Fourth Quarter, the company is still in great shape. Healthy balance sheet, strong profits, and still aggressively spending on R&D.

So then somebody needs to pinch me, because I think I’m dreaming: Intel’s stock is only trading at $21.35 a share -- that’s a P/E of about 15 ... Intel historically has traded at an average P/E that’s closer to 30! Now let’s assume it takes Intel the next two quarters to iron out some of its supply issues. My feeling is, the street will begin to say great things about the company again and the stock will make a quick comeback.

However, the stock can still go lower from here -- but don’t worry, my advice would be to keep buying. My feeling is we’re already buying a dollar for 50 cents -- Now what if I told you tomorrow that you could buy another dollar, but this time for 30 cents? You’d scoop that dollar up as well. The same applies to Intel: Just because the price is going down doesn’t mean the business is going down with it!

The stock won’t stay this cheap forever my friends. We need to buy while we can.

Until next time folks ...