Intel Corporation (INTC, Financial) $20.64/share- is a semiconductor chip maker. They engage in developing advanced integrated digital technology products, primarily integrated circuits for computing and communications. Its primary component-level products include microprocessors, chipsets, motherboards, wired and wireless connectivity. The Company offers products at various levels of integration, allowing its customers the capability to create their own customized systems.
As ‘the market’ is no longer cheap I’m looking for ways to achieve good total returns even if we don’t see a runaway upside as we have since last March. Intel [NDQ:INTC] seems to fit my criteria as a high quality, good yielding name that carries reasonable fundamentals and attractive option premiums on both its puts and calls.
2009 was a down year for Intel. Consensus views see about $0.70 down from 2008’s $0.92. On the flip side, though, virtually everybody is now expecting a huge surge in 2010 EPS to near all-time record levels. Zacks sees $1.49 while Value Line is looking for $1.50 in their recently published [Jan. 8, 2010] full-page report.
At this afternoon’s price of $20.64 that puts Intel’s multiple at just under 13.9x forward estimates. Compare that with the historical P/Es from prior years in the chart below. Here are Intel’s figures from continuing operations as reported by Value Line:
* 2009 figure include VL’s Q4 estimates.
Not only is next year’s projected P/E very low but INTC’s current yield is now a very attractive 3.06% (after an increase to $0.158 quarterly) starting in Q1 of this year. Who would have thought we’d ever be speaking about Intel as a relatively high yielding stock?
Unless you think the earnings will not meet expectations, Intel seems to have very low risk of any serious decline due to the low valuation and yield support. Morningstar sees ‘fair value’ as $23 right now. Standard and Poors carries a 12-month target price of $24. Value Line notes Intel’s financial strength as ‘A++’ and assigns them their highest safety rating. As of September’s quarterly report the company held almost $9.3 billion in cash against total debt of just $2.2 billion.
A rebound to even 15x Zacks’ expected 2010 earnings would bring these shares back to $22.50 by next January. Here’s a nice buy/write play that can deliver excellent returns if you’re a believer.
If Intel shares rise to $22.50 or better [ + 9.1%] by Jan. 21, 2011:
· The $22.50 calls will be exercised.
· You will sell your shares for $22,500.
· The $22.50 puts will expire worthless.
· You will likely have collected $632 in dividends.
· You will end up with no shares and $23,132 in cash.
· You will have no further option obligations.
That would be a best-case scenario total cash-on-cash profit of $7,692/$15,440 = 49.8% over the 12.5 month time horizon of this trade. Any sustained move up of 9.1% or better would lead to almost a 50% total return (assuming you write the puts against paid-up, marginable equity already held in your margin-type account).
What’s the risk?
If Intel shares remain below $22.50 on Jan. 21, 2011:
· The $22.50 calls will expire worthless.
· The $22.50 puts will be exercised.
· You will be forced to buy another 1000 INTC shares.
· You will need to lay out an additional $22,500 in cash.
· You will likely have received $632 in dividends.
· You will end up with 2000 INTC shares and $632 in cash.
· You will have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $20.64 purchase price less the $1.50 /share call premium = $19.14 /share.
On the ‘put’ shares it’s the $22.50 strike price less the $3.70 /share put premium = $18.80 /share.
Your overall break-even would thus be $18.97 /share (excluding dividends). Intel shares could decline by as much as $1.67 /share or (-8%) without causing a loss on this trade.
Disclosure: Author is long INTC shares and short INTC options.
As ‘the market’ is no longer cheap I’m looking for ways to achieve good total returns even if we don’t see a runaway upside as we have since last March. Intel [NDQ:INTC] seems to fit my criteria as a high quality, good yielding name that carries reasonable fundamentals and attractive option premiums on both its puts and calls.
2009 was a down year for Intel. Consensus views see about $0.70 down from 2008’s $0.92. On the flip side, though, virtually everybody is now expecting a huge surge in 2010 EPS to near all-time record levels. Zacks sees $1.49 while Value Line is looking for $1.50 in their recently published [Jan. 8, 2010] full-page report.
At this afternoon’s price of $20.64 that puts Intel’s multiple at just under 13.9x forward estimates. Compare that with the historical P/Es from prior years in the chart below. Here are Intel’s figures from continuing operations as reported by Value Line:
Year | Sales | C/F | EPS | Div. | Avg. P/E | Avg. Yield |
2002 | 4.07 | 1.24 | 0.51 | 0.08 | 45.8X | 0.3% |
2003 | 4.65 | 1.59 | 0.86 | 0.08 | 27.5X | 0.3% |
2004 | 5.47 | 1.94 | 1.16 | 0.16 | 22.1X | 0.6% |
2005 | 6.56 | 2.20 | 1.40 | 0.32 | 17.8X | 1.3% |
2006 | 6.14 | 1.68 | 0.86 | 0.41 | 23.3X | 2.0% |
2007 | 6.59 | 1.98 | 1.18 | 0.45 | 19.9X | 1.9% |
2008 | 6.76 | 1.74 | 0.92 | 0.55 | 21.7X | 2.8% |
2009* | 6.30 | 1.55 | 0.68 | 0.56 | 25.0X | 4.0% |
* 2009 figure include VL’s Q4 estimates.
Not only is next year’s projected P/E very low but INTC’s current yield is now a very attractive 3.06% (after an increase to $0.158 quarterly) starting in Q1 of this year. Who would have thought we’d ever be speaking about Intel as a relatively high yielding stock?
Unless you think the earnings will not meet expectations, Intel seems to have very low risk of any serious decline due to the low valuation and yield support. Morningstar sees ‘fair value’ as $23 right now. Standard and Poors carries a 12-month target price of $24. Value Line notes Intel’s financial strength as ‘A++’ and assigns them their highest safety rating. As of September’s quarterly report the company held almost $9.3 billion in cash against total debt of just $2.2 billion.
A rebound to even 15x Zacks’ expected 2010 earnings would bring these shares back to $22.50 by next January. Here’s a nice buy/write play that can deliver excellent returns if you’re a believer.
Cash Outlay | Cash Inflow | |
Buy 1000 INTC @$20.64 /share | $20,640 | |
Sell 10 Jan. 2011 $22.50 calls @$1.50 /share | $1,500 | |
Sell 10 Jan. 2011 $22.50 puts @$3.70 /share | $3,700 | |
Net Cash Out-of-Pocket | $15,440 |
If Intel shares rise to $22.50 or better [ + 9.1%] by Jan. 21, 2011:
· The $22.50 calls will be exercised.
· You will sell your shares for $22,500.
· The $22.50 puts will expire worthless.
· You will likely have collected $632 in dividends.
· You will end up with no shares and $23,132 in cash.
· You will have no further option obligations.
That would be a best-case scenario total cash-on-cash profit of $7,692/$15,440 = 49.8% over the 12.5 month time horizon of this trade. Any sustained move up of 9.1% or better would lead to almost a 50% total return (assuming you write the puts against paid-up, marginable equity already held in your margin-type account).
What’s the risk?
If Intel shares remain below $22.50 on Jan. 21, 2011:
· The $22.50 calls will expire worthless.
· The $22.50 puts will be exercised.
· You will be forced to buy another 1000 INTC shares.
· You will need to lay out an additional $22,500 in cash.
· You will likely have received $632 in dividends.
· You will end up with 2000 INTC shares and $632 in cash.
· You will have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $20.64 purchase price less the $1.50 /share call premium = $19.14 /share.
On the ‘put’ shares it’s the $22.50 strike price less the $3.70 /share put premium = $18.80 /share.
Your overall break-even would thus be $18.97 /share (excluding dividends). Intel shares could decline by as much as $1.67 /share or (-8%) without causing a loss on this trade.
Disclosure: Author is long INTC shares and short INTC options.
