Intel Makes A Compelling Large-Cap Investment, BofA Says In Upgrade

Intel Corporation INTC, which is among the few large-cap stocks to carve out a gain in 2018, could be in for more upside, according to Bank of America Merrill Lynch.

The Analyst

Analyst Vivek Arya upgraded Intel from Neutral to Buy and upped the price target for the shares from $52 to $60.

The Thesis

Notwithstanding concerns about macroeconomics, competition and 10nm product delays, Intel is relatively stable due to its expanding opportunity set, incumbency, scale and U.S. manufacturing base, Arya said in a Friday note.

The analyst said he expects the company to expand margins and report above-consensus free cash flow thanks to its transformation to a more data-centric company.

Additional upside could be in order if the Intel's next CEO rethinks the low-inventory memory business, Arya said. 

Large U.S. investors continue to underweight the stock, while a majority of the sell-side remains sidelined, he said. 

The analyst models 2.5-percent sales growth in 2019, a deceleration from the 13-percent growth in 2018, dragged by tougher data center comps.

Intel's projected growth is better than BofA's forecast for core-semis excluding memory of 1.5 percent, Arya said.

"Our model already reflects 300 bps share loss in PCs/servers processors to Advanced Micro Devices, Inc. AMD, though we believe the expanding pie and INTC's incumbency, product breadth and larger addressable market in networking and 5G (where AMD does not participate) can help INTC offset share losses," the analyst said. 

BofA raised its 2019 and 2020 pro forma EPS estimates for Intel to $4.80 and $5.25, respectively, higher than the consensus estimates of $4.55 and $4.69. The firm's estimates reflect 60-75-basis point operating margin expansion and 12-percent FCF/share growth.

This can help Intel to close the 20-percent valuation gap Intel has with large-cap peers.

The Price Action

Intel shares were rising 5.28 percent to $46.84 at the time of publication Friday. 

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