3.27.13: Intel – Technicals Improving, Still Cheap on Cash-Flow Basis

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Gary Morrow’s chart of Intel is attached. His technical commentary will follow.

Fundamentally, 2012 was the worst year for PC sales since 2001, and the 4th quarter was worst quarter of the year, for a myriad of reasons we won’t discuss here.

The current EPS estimate for INTC for 2013 is $1.93, versus $2.60 just a year ago, so numbers are still being cut, but at a slower rate.

It is the cash-flow valuation that continues to intrigue us: At $22 per share INTC is trading at 6(x) cash-flow and 15(x) free-cash-flow, with a 3.5% dividend yield. INTC cash-flow generation has allowed the microprocessor and semiconductor giant to retire 1 billion shares since Dec ’07, from 6.0 billion fully diluted shares outstanding to 5.0 billion as of 12/31/12.

No question this is a value stock. If PC sales should return to just low mid-single-digit growth, INTC should trade in the high $20’s again, fundamentally.

Technical commentary:

Intel’s near term technical picture has improved dramatically this week. Yesterday the stock took out the upper trendline of a three week bull flag. The gains continued today, albeit modestly, as trade showed a healthy uptick. The two day 3% gain has put some distance on a flat-lining 50 day moving average as well. With the 50 day developing a more supportive stance in the near term INTC will have solid footing in place.

There are a few obstacles still ahead but the basing action since the November lows is now looking much more constructive. Just above the early March highs, set back on the 8th, is an ugly breakdown gap left behind following the company’s poor guidance on January 18th. Selling pressure was enormous on the news pushing shares over 6% lower. The stock moved sideways until late last month when another selling wave hit.

Despite a two day 4% hit INTC held in well above the November lows. Selling pressure was showing signs of easing as a basing pattern was taking shape. This month INTC has put in a higher low and, with a bit of follow-through in April, I expect another high low on the monthly charts.

I believe INTC will need a healthy volume jolt to power through heavy resistance just above $22.00. Fortunately the stock has a layer of solid support in place if a bit of back and fill trade is needed before a clear breakout is achieved. Once through $22.00 INTC will then have a heavy 200 day moving average to deal with just below $23.00. Just above is the 2013 highs of $23.05. It’s likely a healthy consolidation will be the result of a battle with this heavy supply zone.

If Intel is truly in the early stages of a measurable recovery rally, a pullback from this area will be shallow and short lived.

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