Intel Scorned by Investors, Loved by Funds

BOSTON (TheStreet) -- Intel (INTC), the chipmaker that's reporting quarterly earnings after the stock market closes today, is among the most scorned tech stocks by investors. Still, some fund managers including Carl Goldsmith judge the company differently.

Goldsmith, manager of the Marshall Large Cap Focus Fund ( MLIFX), notes that Intel is "no home run in terms of growth rates," but he still expects earnings to grow at a double-digit rate over the next five years, making the stock an attractive bet based on its risk-reward profile. The fund manager projects that Intel's shares will outperform the broader market this year.

That view may be tough to swallow. While the tech-heavy Nasdaq has risen 18% over the past 12 months, Intel is little changed, eking out a 1.4% gain. The Marshall Large-Cap Focus Fund had about a third of its assets in technology stocks as of Nov. 30, and Apple ( AAPL), Google ( GOOG), Microsoft ( MSFT) and IBM ( IBM) are among the fund's top holdings.

Still, Intel has beaten earnings-per-share targets over the past five quarters, and the world's largest chipmaker is expected by analysts to post record revenue in the fourth quarter. But investors are concerned most with the fact that Intel's chips are absent in smartphones or tablets, which have ridden to success as the next technological wave, thanks to Apple's iPhone and iPad.

Goldsmith, though, doesn't think that Intel is going to be left behind.

"The overall number of devices that will be out there is going to continue to grow at a reasonably rapid rate," Goldsmith says. "I'm talking globally. The global markets are very large. Intel is extremely well-positioned as a global player. It has a terrific reputation globally. There's no better manufacturer in the world."

Goldsmith says his best guess is that Intel will be able to incorporate silicon into all of these kinds of devices. While there's no way of knowing for sure, Goldsmith says he's less concerned about smartphones because it's not clear any company can make a lot of money in that market.

"People are making a mistake in underestimating Intel's ability to adapt to the environment that is likely to exist in the next three to five years," he says. "While they don't have an Intel processor in anybody's table device today, I'd be extremely surprised if, 18 months from now, they weren't incorporating a decent amount of silicon out there. That will lay to rest these fears that Intel has died."

Those fears show no sign of abating, though, in the immediate aftermath of Intel's fourth-quarter report. A Thomson Reuters poll of 41 analysts shows they expect Intel to report earnings of 53 cents a share on revenue of $11.4 billion. That compares to year-ago earnings of 40 cents a share and revenue of $10.6 billion. Intel should see gross margin -- a key measure of profitability -- rise to 66.7% in the quarter, according to the Thomson Reuters poll.

Even so, Goldsmith isn't expecting investors to give Intel's results a warm reception. "My guess is that no matter what Intel reports, the stock will go down," he says. "That's kind of how it goes. It's a silly game. I've been managing money for 30 years. This whole game of quarterly earnings is old."

By Goldsmith's own admission, he doesn't think Intel's business in the fourth quarter "really matters that much. It was a transition quarter. They were getting rid of a lot of old inventory and sending out the new Sandy Bridge processors into the market. Whether they're $100 million or $150 million short or $100 million over, I could care less."

While he will be paying attention to top-line growth and the gross margin story, Goldsmith says he's much more interested in what Intel has to say going forward.

"Usually as they start a new year, Intel is a little more open about commentary going forward, not just for one quarter but for the full year," he says. "I'm much more interested in their commentary and discussion for 2011 and how they see demand out there globally. That's much more important to me than the numbers themselves."

While Intel has lagged behind the market over the past year, the stock has been a big winner for the relatively young Marshall Large Cap Focus Fund. Since the fund's inception in September, Intel shares have climbed 18%, although that still trails a 28% rise on the Nasdaq. The fund's 13% advance in the fourth quarter outpaced a 9.3% increase on its benchmark, the S&P 500.

With more than $40 million in total assets, the Marshall Large Cap Focus Fund has found early success by combining a value-and-growth approach with investments. The capitalizations of the companies are large, and the fund holds anywhere from 40 to 50 names that Goldsmith calls his best ideas. As the fund takes a long-term approach, turnover is low. The majority of companies, like Intel, pay dividends.

In terms of the portfolio's composition, Intel is clearly a value pick, although Goldsmith says the company still has growth characteristics. "Given its size, it's not the growth company that it used to be," he says. "It's no home run in terms of growth rates, but the stock is trading at 10 times 2011 estimates. It's yielding 3.5%. It is throwing off a tremendous amount of free cash flow. Those are the attributes that attract us."

Goldsmith says that while he expects few surprises in Intel's fourth-quarter numbers, he will be watching for red flags, which would include management commentary that the company is possibly behind the curve.

"What would change my mind on Intel is if they said they were having technological difficulties with 22 nanometers, they were falling behind, and they're going to have to increase their research-and-development investments much more than they expected," he says. "That would indicate that they're behind the curve, and I don't see that. My position today is that they're not really behind the curve, they're in front of the curve."

So while individual investors may react negatively in the short term based on Intel's fourth-quarter numbers, Goldsmith is more than happy taking a long-term view that Intel will be a smart bet.

"I don't think Intel is going away. In talking to the company and trying to understand their road map, we feel pretty good that Intel is not sleeping at the switch," he says. "You're not paying very much right now for the opportunities that we think are likely to exist over the next two, three, four or five years."

Intel's stock is at 10 times earnings yielding 3.5%, which Goldsmith says is "not a bad risk-reward profile." He believes Intel should trade at a modest discount to the market multiple of 13 to 13.5 times this year's earnings. Assigning a multiple of 12 times earnings, Goldsmith says he wouldn't be surprised to see Intel shares rise to $25.

"It's not a home run, but it's not in the portfolio as a home-run stock," he adds. "It will beat the market this year."

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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