In this installment of Using a Value Line Report, we will be comparing two behemoths in the technology industry, Intel Corp. (INTC - Free Intel Stock Report) and International Business Machines Corp. (IBM - Free IBM Stock Report). Intel is the younger of the two iconic tech giants. Still, though it has not been around as long as IBM (founded in 1911), the company traces its roots back to 1968, and with equally massive market caps in the hundreds of billions of dollars and comparable enormous revenue streams, there is no doubt that these goliaths are evenly matched in the fiercely competitive contemporary landscape of the tech sector. Upon further analysis, we will establish the investment merits of both businesses and attempt to determine which of the two has the edge, if any exists.
When evaluating these two industry bellwethers, there are several appealing factors that should catch the eye of interested investors. The first data points that ought to stand out are the Timeliness ranks located at the top left corner of the page in the Ranks box. Both of these equities are timely and, hence, expected to outpace the broader market’s price performance averages over the next six to 12 months. A closer look reveals that IBM boasts the superlative rank of 1 (Highest) versus Intel’s rank of 2 (Above Average). This simply means that, while both stocks are sound choices for momentum accounts, in the year-ahead sprint, IBM is projected to outpace Intel. Moreover, although both stocks have declined, along with the broader market, since our October review (IBM is down about 6%, to roughly $179 a share and INTC is down about 10%, to approximately $30 a share), IBM’s P/E multiple (Top Label) of about 10 suggests a more favorable first-glance valuation than INTC’s 13x earnings. In other words, although IBM’s equity price is almost 6 times that of Intel’s, IBM shares appear to be more reasonably valued. Hence, over the near term, IBM looks like the more attractive play.
The longer-term horizon offers similar evidence to support IBM’s leg up on Intel. Indeed, the box below the Ranks section displays the 3- to 5-year Projections. This indicates our expected Target Price Range and Total Return Potential for each respective company, over the next 3 to 5 years. Comparing the companies based on these data, we see that IBM stock offers more attractive potential for capital gains out to late decade. Moreover, while both equities pay solid dividends, which are expected to rise over the long haul, IBM’s Total Return Potential (capital gains plus dividends divided by the current price) is more appealing over the aforementioned span, as well, despite its slightly lower yield.
Interestingly enough, however, a desire for closer scrutiny here actually reveals somewhat perplexing results. Shifting our attention to the Statistical Array, where the historical data and financial estimates live, it would appear that IBM’s revenues have faltered of late and Intel is, in fact, expected to generate stronger revenue comparisons (year to year) in 2014. Furthermore, Intel’s margin expansion is expected to be greater over the span to 2017-2019. All else being equal, one would expect better price performance from the company that exhibits stronger operational efficiency. Intuitively, this leads investors back to the question of valuation. Although the P/E multiple is a rather basic valuation tool, it speaks volumes when comparing two companies that appear to be fairly matched on the basis of operational performance and projected profit growth. Here, we see that IBM is the more favorable choice for both the short- and the long-term horizons because its current P/E multiple is below the 3- to 5-year projected average for both companies (13). Thus, IBM offers a more attractive entry point at this juncture, in spite of its lofty price.