the INTC preannouncement
INTC intends to announce 3Q12 results on October 16th. But it already knows that its earnings will fall below its previous guidance by a substantial amount. So, while the company still has to dot the is and cross the ts, it issued a short press release stating this on September 7th.
INTC now expects 3Q12 revenue to be $13.2 billion rather than $14.3 billion, and for its gross margin (that is, its profit margin after subtracting all direct costs of making its products) to be 62% of sales rather than 63%. Basically, all other costs remain the same.
By my back-of-the-envelope calculation, this means INTC will likely report 3Q12 eps of $.52-$.54, rather than the $.63-$65 or so it had been expecting when it issued its guidance two months ago. 3Q11 eps? …$.69, on revenue of $14.3 billion.
what’s going on?
The unofficial (though pretty much binding, nonetheless) protocol for such announcements is to list the reasons for the earnings revision in order of importance, with the most important going first. That would mean:
1. customers worldwide are not fully replenishing their stock of INTC chips as they sell products containing them. This is a standard response to weakening demand, especially if PC manufacturers believe they can quickly get supplies if needed. Let INTC hold the inventories, not them. Therefore, slower economic activity is resulting in lower sales.
A reasonable guess is that INTC’s 8% slide in sales vs. its prior expectations breaks out into 4% due to weaker end-user demand and 4% defensive behavior by PC makers.
Operating leverage is making the bottom line look considerably worse.
2. one customer group sticks out: corporations are slowing their replacement of employees’ aging PCs (but not their spending on servers or on the cloud).
This almost goes without saying. Corporations rarely outspend their cash flow. If they sense cash flow contracting, they cut discretionary spending.
3. one geographical area does, too: slowing demand in emerging markets (which had been a pillar of strength earlier in the year).
Presumably the supply chain is longer in emerging markets than in developed ones, as well as harder to get good information about. So the slowdown in end-user demand may have been going in somewhat longer in emerging markets than in developed.
To recap, my interpretation of the release is that global economic weakness is the main cause of the preanouncement. Emerging market slowdown is a factor worthy of note, but the least important of the three elements cited. Windows 8 isn’t really an issue, since INTC had already accounted for a pre-release buying pause in its previous guidance.
the stock is down almost 8%…
…since the INTC announcement. As an owner of the stock, I’m not happy. As an observer of the stock market, I think the selloff is overdone. But it’s not entirely crazy, either. I regard INTC as a “show me” stock in the high $20 range. At, say, $27-$28, I think the “old” INTC business of selling mostly PCs is fully valued.
For the stock to break into $30-land, I think it has to demonstrate some success in penetrating the mobile market–smartphones and tablets. If you think INTC has no shot–and I think that’s the consensus among Wall Street analysts and the media–the stock is mildly undervalued today, but that’s all.
On the other hand, if you think INTC has a reasonable chance (that’s my opinion) you get the possibility of some upside, a low-risk option on substantial upside if INTC’s newest chips crack the mobile market, plus a dividend yield above 3% while you wait.
Although it sounds odd at first, it’s also possible that the current slowdown is good for INTC, if it buys extra catchup time to get the company’s 14nm chips on the market.
a case of operating leverage
That’s my topic for tomorrow–how this situation presents a good analytic opportunity to see operating leverage analysis in action.