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Microsoft, Intel Are Buys Ahead of Earnings

BOSTON (TheStreet) -- Tech goliaths Microsoft (MSFT) and Intel (INTC) are sitting on record cash balances and have delivered solid growth amid the recovery, but their stocks haven't matched expectations, including rave reviews from equity researchers. Intel is due to report second-quarter results Wednesday and Microsoft will release fiscal fourth-quarter results Thursday. The tech dividend stocks are attractive picks, even as growth tapers.

Analysts forecast that Intel, the world's largest chipmaker, will suffer a marginal decline in second-quarter adjusted earnings to 51 cents. They expect sales to have grown 19% to nearly $13 billion. Microsoft is predicted to have increased adjusted earnings by 12% and sales by 7.5%. With market capitalizations of $121 billion and $228 billion, respectively, such expansion is impressive, especially in light of sub-2% gross domestic product growth. Going further, Microsoft is the world's most powerful software company, with a wide economic moat, and Intel has lead market share in semiconductors. Their financial girth is apparent on balance sheets.

Corporate America has, quite literally, never been healthier -- in stark contrast to a government drowning in an estimated $75 trillion in cumulative debt and unfunded liabilities, including Medicare and Social Security. The fiscal uncertainty has investors unwilling to buy equities, despite historically cheap valuations, near-peak margins and efficiency and the aforementioned financial flexibility. This behavior looks increasingly illogical as mega caps such as Microsoft and Intel demonstrate that international growth prospects trump a tepid domestic economy. In sum, these blue-chip companies are still attractive.

Intel gets positive reviews, including "buy," "outperform" or "overweight" recommendations, from 61% of researchers in coverage; Microsoft gets 69%. At the end of its fiscal third quarter, Microsoft held more than $50 billion of cash, equivalents and short-term investments and just under $15 billion of debt, for just over $35 billion of net cash and a quick ratio of 2.5. A pending acquisition of Internet phone-company Skype should reduce net cash by $8.5 billion. The buyout has been applauded by researchers, who have been frustrated by the company's lethargy amid liquidity. Skype generated $180 million of unlevered free cash flow in 2010.

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