Don’t Overlook this Stock’s Bargain-Bin Price

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Shares in Intel Corporation (NASDAQ:INTC) were having a fine 2016 — up 10% at one point — and then Intel stock gave up most of its year-to-date gains after earnings earlier this month.

Don't Overlook Intel Corporation (INTC) Stock's Bargain-Bin PriceThe question now is INTC stock worth buying at this lower price?

There was nothing wrong with Intel’s third-quarter earnings. The chipmaker posted record profits. At 80 cents a share, adjusted earnings exceeded Wall Street’s earnings estimate by 8 cents. That’s a big beat.

Sales topped expectations, too. The top line expanded 9% to $15.8 billion. Wall Street was modeling revenue of $15.6 billion.

The backward-looking numbers looked pretty good, but then the market doesn’t pay for past performance. It’s all about future earnings, and on that basis, INTC spooked investors. The company guided fourth-quarter revenue to $15.7 billion, which is significantly below what analysts were expecting. The sales hit comes courtesy of start-up costs for next-generation manufacturing capabilities.

That sounds like a good use of capital expenditures. Leveraging wise investments to goose future profits is what a company like INTC is supposed to do. But the market was having none of it. Intel stock has lost more than 7% in wake of the Oct. 18 earnings report.

The sharp drop in INTC stock seems overdone. After all, it’s not like the company took an axe to its outlook. It’s sort of bizarre. How does the market punish a stock to this degree for issuing slightly disappointing revenue guidance for the ongoing quarter? If Intel didn’t say anything and fourth-quarter revenue came up short of estimates, the drubbing would have been far less severe. Heck, the company missed analysts’ average revenue estimate in the June quarter and pretty much cruised right through.

Intel Stock Is on Sale

These clues suggest INTC stock might be beaten down for no good reason.

Most companies in Intel’s sector — and probably most companies in general — are cutting back on investment. INTC is plowing ahead even as its results and stock takes hits. More importantly, Intel is investing wisely.

INTC stock still struggles with the headwind of PC sales. They’re a slowly melting iceberg. But this is old news. What investors should be focusing on is Intel’s success in the segment that makes server chips for cloud-based computing. The Data Center Group contributes about 50% of operating earnings. Revenue is accelerating. This area of growth is a secular, not cyclical, trend. PCs might be in decline, but servers have a bright future.

INTC is also bullish on the Internet of Things, virtual reality and new memory technologies. These are longer-term stories, but at least they’re in the pipeline.

The market doesn’t appear to appreciate how quickly the data center group is making up for a decline on the PC side. Operating profits from these divisions are now running neck and neck.

Intel stock trades at a bit more than 12 times forward earnings. That’s not much of a premium for a company with a projected compound annual growth rate of 10%. That multiple represents a slight discount to its own five-year average and a deep discount vs. the broader market. Additionally, INTC stock is cheaper than the S&P 500 when looking at how fast shares are rising relative to growth prospects.

Lastly, a word about the Intel dividend. Recent weakness in INTC stock has lifted the dividend to almost 3%. That’s pretty attractive for an equity income investor in a world of super-low interest rates. If you want to capture that yield on your personal cost basis, be advised that the payout goes ex-dividend on Nov. 3.

The bottom line is that INTC stock is currently on sale. The company has a sound strategic plan and pays a handsome dividend. Bulls only need to give Intel stock some time to work.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.