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My Favorite Tobacco Stock is…Intel?
Posted by: Charles Sizemore (IP Logged)
Date: January 8, 2013 12:31PM

Yes, you read that correctly. My favorite “tobacco stock” is Intel Corp (INTC).

Lest you think I’ve lost my mind, I am aware that Intel does not sell or market cigarettes or other tobacco products. Intel is the world’s premier designer and manufacturer of computer processors.

But while Intel is not a tobacco company, it most certainly is a tobacco stock, or at least it shares many of their characteristics.

This requires a little explaining. If you’ve read some of my past posts, you are probably familiar with my reasons for liking tobacco stocks over the long haul, even if I recommend avoiding them at current prices (see The Price of Sin and Time to Stop Bogarting Cigarette Stocks). Because of the social stigma associated with vice investments like tobacco, alcohol and firearms, many institutional investors shun them, either by choice or by socially-responsible investment mandate. This causes sin stocks to be priced as perpetual value stocks, with the low valuations and fat dividends that this entails.

Well, I admit, in this particular respect Intel has nothing in common with tobacco stocks (even if it is priced like one at the moment). It’s hard to find a scale by which Intel would be considered socially irresponsible. But let’s take a look at some of the other characteristics that make tobacco stocks—and Intel—interesting.

Tobacco companies have gargantuan barriers to new competition—what Warren Buffett might call an unassailable moat. Given the legal and political risk and the size and scale needed to deal with both, it would be next to impossible to start a new tobacco company now. You would need infinitely deep pockets and decades’ worth of political connections. As a result, Big Tobacco has become an entrenched oligopoly in which a handful of players—such as Altria (MO), Reynolds American (RAI) and Lorillard (LO)—completely dominate.

But even if you could start a new tobacco company, why would you? It’s not exactly a business with a bright future. In the developed world, tobacco is a business in steady but terminal decline.

This brings me back to Intel. I’m actually in the minority among investors at the moment in that I see a bright future for Intel. No, they haven’t figured out mobile yet, but they will. As mobile devices become more and more sophisticated, they will need the power than only Intel can provide. And there is also the server business, which accounts for roughly a quarter of Intel’s revenues. Ironically, while Intel has yet to really break into mobile, its server business has benefitted handsomely as the mobile revolution has created greater demand for cloud services.

Yet this is not how the market views Intel right now. No, Intel is a company resigned to gentle decline, as its core PC market inevitably shrinks. From the way Intel bears talk, PC users are disappearing from polite company faster than smokers, forced to type on their physical keyboards in alleys behind buildings or in doorways.

For the sake of argument, let’s assume they’re right. Intel would still be a buy at current prices.

As the Big Tobacco has proven for decades, companies in declining industries can make excellent investments under the right conditions. If you have a dominant market position (think back to Warren Buffett’s “moats”), a conservative balance sheet, and have ample cash flow for share repurchases and dividends, you can do quite well by your investors even in a shrinking market. It’s worked for Big Tobacco investors, and it will work for Intel investors as well.

At just 9 times earnings, Intel is priced significantly cheaper than any major tobacco stock, and its dividend is competitive at 4.3%. I might add that Intel’s dividend has risen by over 40% in the past two years and that its dividend still only accounts for 37% of (depressed) earnings.

Buy Intel and reinvest your dividends. If I am right, Intel will regain its place among America’s most reputable growth stocks. But even if I’m wrong, Intel is positioned to offer “tobacco like” returns for the foreseeable future.

Disclosures: Sizemore Capital is long INTC and DDAIF

Stocks Discussed: INTC, MO, RAI, LO,
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Re My Favorite Tobacco Stock is Intel
Posted by: batbeer2 (IP Logged)
Date: January 8, 2013 01:27PM

Thank's for an interesting article!

>> No, they haven’t figured out mobile yet, but they will.

The fact that Intel isn't producing a lot of chips for mobile devices doesn't mean they can't.

So why don't they?

There is simply no denying that Intel has the best chip foundries by far. Intel is currently producing 22nm chips on a HUGE scale. As usual, the rest is playing catch-up. It's not Intel's designs that are consistently superior, it's their production plants and processes. Intel can produce processors more efficiently and on a "smaller", more efficient (cooler running!) chip than anyone else.

If you own the world's most advanced and efficient foundries are you going to use that capacity to produce chips that sell for $100-$2000 (PC) or would you rather produce chips that sell for $10-$50 (mobile)?

Just as there is nothing to stop AMD from producing PC processors, there is also nothing to stop Intel from churning out ARM (or MIPS or ATOM) processors. It just doesn't make business sense (yet).

Just random thoughts, thanks again.

Stocks Discussed: INTC, MO, RAI, LO,
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Re My Favorite Tobacco Stock is Intel
Posted by: tonyg34 (IP Logged)
Date: January 8, 2013 03:26PM

intel as a cyclical stock, totally agree

intel akin to tobacco stocks, no bloody way

why? because tobacco companies have demonstrated pricing power and the price of processing power is falling.

interesting article

but not an apt comparison

Stocks Discussed: INTC, MO, RAI, LO,
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Re My Favorite Tobacco Stock is Intel
Posted by: batbeer2 (IP Logged)
Date: January 8, 2013 03:34PM

>> and the price of processing power is falling.

Is it?

The price of a decent processor for a PC has been about $ 500 for a decade now (just off the top of my head). Yes it has become more powerful but it hasn't become cheaper.

Stocks Discussed: INTC, MO, RAI, LO,
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