UBS Slaps a Buy on Intel

Headcount reductions and improving microprocessor unit sales should help Intel(INTC Quote) raise margins over the next two years, UBS argued in upgrading the shares to buy from hold Monday.

UBS also raised its Intel price target to $23 from $21, reflecting a higher 2007 earnings estimate of $1.28 a share and a higher estimate of Intel's price-to-earnings multiple.

The upgrade is "based on our expectations for positive trends for gross margin and operating margin that is supported by a more positive view of Intel's competitiveness both in the near term and longer term," UBS said. "Our higher 2007 EPS estimates and P/E multiple reflect our expectations for improved longer-term gross margins and more near-term operating-expense leverage."

The brokerage expects Intel's year-over-year growth in microprocessor unit sales to go from nothing to near 10% by the end of 2006, then remain in the double digits through 2007, in part because of the Microsoft(MSFT Quote) Vista release.

Intel's shares, down 26% for the year, are trading near a three-year low. UBS believes the stock will climb back to levels of late 2005.

"Based on the historical behavior for Intel's stock relative to the year-over-year trend in processor units, as a 10% year-over-year unit growth rate has historically been associated with about flat year-over-year performance in the stock, this would imply that the stock could recover into the low-$20s in late 2006 or early '07, as the year-over-year trend in processor units reaccelerates above 10%," the brokerage wrote.

UBS also expects Intel to scale its workforce back from the roughly 103,300 people it employed in the first quarter.

"If Intel did nothing more than to go into 'attrition mode,' i.e., no new hires, the normal attrition rate of 5%-6% would create pretax savings of roughly $500 million to $600 million over 12 months (at an average of $100,000/employee)," UBS noted. "If Intel were to take headcount back to the level of a year ago, it would reduce pretax operating costs by roughly $1.6 billion over 12 months."