Brian Colello: There are three names with healthy dividends in technology that we'd like to highlight, all in the semiconductor space. They've been beaten down due to a near-term slowdown, but we think these are the times when it makes sense to buy moaty businesses that are poised to recover when the industry upturn begins. It may get worse before it gets better, but when the pickup in demand happens, it's often too late.
First is Intel. We have a $65 fair value estimate and see the stock as 25% undervalued. Intel has been beaten up due to a CEO transition and manufacturing delays, but we think it's a wide-moat firm that will ultimately recover from its missteps. The firm is still well-positioned, not only as the dominant PC processor supplier, but also the dominant server and data center chipmaker. With growing opportunities in automotive, artificial intelligence, and 5G, Intel is highly profitable and we think the dividend is safe.
Our other top two picks in Tech are both in chip equipment, KLA Tencor and Lam Research. KLA has a wide moat with a 3.2% dividend yield. We have a $128 fair value estimate and see the stock as about 25% undervalued. Lam Research, narrow moat, positive moat trend with a 2.9% dividend yield. We have a $185 fair value estimate and see the stock as about 20% undervalued.
The story is similar for both firms: 2017 and early 2018 was a tremendous time for chip equipment spending as Samsung and other memory chipmakers expanded their capacity. There's now been a slowdown in spending on chip equipment. However, we think a recovery is in the works for 2019 and long term. There's ultimately few substitutes for the type of equipment that KLA and Lam provide to its customers.
KLA dominates in process diagnostic tools, helping customers improve their manufacturing yields. Lam Research is strong in etch and deposition, needed to carve out microscopic transistors inside of semiconductors. In both cases, we again think the dividend is safe and that management is committed to paying current payouts.
So for investors willing to weather the storm in the semiconductor space, we like Intel, we like KLA-Tencor, and we like Lam Research, not only for their nice dividends but also potential upside in the stock price.