Tag Archives: INTC

Intel’s 1Q13–another transition quarter

April 19, 2013 By in earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , Leave a comment

the report

Intel (INTC) reported 1Q13 earnings after the close on Tuesday.  Revenue came in at $12.6 billion, down 2.5% year-on-year.  EPS, however, were $.40, down 25% vs. 1Q12.  The latter figure was slightly below the Wall Street consensus of $.41.

INTC believes this is a low point for its business, expecting revenues to show slow but steady improvement as the year progresses.  It expects earnings to advance at a faster rate.  Brokerage house analysts as a group are a bit more cautious, projecting 2Q13 EPS of $.39.

Consensus earnings per share for the full year are $1.88, a number I have no quarrel with.  INTC’s dividend yield is just over 4%.

What I find most interesting is that INTC shares, one of the worst performers of 2012, have been rising since the company’s earnings report, in an overall shaky market.

How so?

I think it’s because INTC is now a qualitative “big picture” stock, not one that will be driven by near-term earnings.

details

First, some housekeeping stuff from the report.

Servers, which comprise about 20% of INTC’s business, were a strong point.  High-end and cloud models are growing at 30%+.  Generic corporate servers, purchases that rise and fall with GDP, are up a little.  Overall server revenues were up 7.5% yoy during 1Q13.

PC chip sales were down 6% yoy.  INTC’s customers have continued to work down their PC inventories from already lean levels, so end user demand is a bit better than INTC’s sales would indicate.  At some point, one would expect PC makers to rebuild inventories to more normal levels.

The transition away from old school heavy, clunky laptops–epitomized by DELL or HWP offerings–toward ultrabooks and other “post-PC” devices (think: Samsung or Asus) is going faster than INTC had expected.  This has several consequences for the company:

–older chip-making machinery is going out of service faster than anticipated, meaning extra depreciation charges,

–clients are asking for larger numbers of test models for INTC’s newest chips, where production isn’t still super-efficient, again meaning higher costs, and

–some older machinery can be reconfigured for use in cutting-edge chips, saving INTC $1 billion in capex this year.

The first and second items non-recurring.  Together, they’re the reason for the 1Q margin deterioration that led to the sharp decline in operating earnings on only a very small decrease in revenues.  As I mentioned earlier, INTC believes the worst on this front is behind it.

the big picture, according to INTC

INTC thinks that the chips it’s starting to ship this quarter will spark a quantum shift in the market for mobile computing devices.  By next year, we’ll have more powerful, touch-screen ultrabooks with better graphics and longer battery life selling for around $500.  Don’t need sleek or instant-on?   …then $400.

Tablets will see big power improvements and  maybe a $300 price for an iPad clone.

New form factors will emerge, too.

The disappearance of the huge price gulf between ultrabook and tablet will shift demand toward the former. That’s good for INTC.  Chips that use less power and generate less heat mean INTC has a chance to be a real presence in the tablet category for the first time.

can this happen?

Yes.  I think it will, and maybe even in time  for the holiday selling season this year.

The only real question is whether INTC can maintain its dominant market share in PC-like devices and displace ARMH offerings in some tablets (smartphones are only a possible INTC story in, say, 2016).  I like INTC. I hold the stock.  I think they have a very good shot at doing what they say.

as an investor…

…I think the rewards outweigh the risk that INTC finds itself the odd man out in an ARMH-dominated mobile world.

Why?  It’s valuation.

–arguably, INTC’s server business as a stand-alone is worth than the current market cap of the entire company.

– INTC has by far the best chip manufacturing operations in the world.  They’re certainly better than TSMC’s, the king of the third-party foundries.  Ignoring its intellectual property, were INTC valued solely for its manufacturing capabilities on the same basis as TSMC, INTC shares would be well over $30 (yes, gross margins would be lower, but so too would R&D and marketing expenses).  TSMC also has a much more cyclical earnings record).

So I’m content to wait.

more thoughts on Intel (INTC)

January 22, 2013 By in earnings conference calls, Recent Market Action, Stock ideas Tags: , , , , , Leave a comment

reaction to INTC’s 4Q12

I’ve been reading financial commentary on the INTC 4Q12 results.  Analysts seem to fall into two camps:  one thinks that the stock declined by 6%+ because the 4Q report confirms the secular demise of the PC industry; the other thinks the earnings were, for one reason or other, disappointing.  I don’t think either is right.

As to the earnings, fourth quarters are always tricky to figure.  Companies apportion costs quarter by quarter during their financial year on a pro rata basis given their projections of full-year results.  4Q is a kind of residual quarter when all sorts of final adjustments are made to the accounts, so that the quarterly numbers total to the full-year actuals.   It’s impossible for outsiders to figure out in advance what these adjustments may be.  In addition to these “usual” difficulties, in the INTC case we also knew there would be plant and equipment writeoffs + startup costs to be factored in.

In other words, the idea that the consensus Wall Street estimate for 4Q would be accurate had to be taken with a heavy grain of salt.  INTC beat it handily, anyway.

The decline of the PC story has been with us for some time.  It may also be true, especially in the developed world.  But I think the situation is more complex than is typically portrayed.  Cyclical economic weakness is certainly playing some role in lackluster sales, especially in emerging markets, where a PC is a major consumer expenditure.  In addition, the major sellers of PCs in the US, Dell and HP, make machines that are ugly, clunky and unreliable.  Both are gradually being displaced by Asian manufacturers like Asus and Acer, I think, but that won’t happen overnight.  In other words, evaluating the global PC market from the state of the US, which most analysts do, is probably a mistake.

Personally I’m keeping an open mind about the “demise” story.  But since I think the assumption that it’s correct is already heavily discounted in INTC’s current price, I don’t think “demise” is a reason to sell the stock.

what worries me

1.  As I understood the INTC story, 2012 was supposed to be a transition year for earnings, marked by peak R&D+ plant and equipment spending.  2013 was supposed to be the year when INTC began to cash in on this heavy investment.  Spending would recede, and INTC would be buoyed by its first significant participation in the cellphone and tablet markets.

Instead, we learned from the INTC earnings announcement that 2013 will see higher investment on R&D and P&E than 2013.   I’ve read from tech blogs that INTC chips tuned for Windows tablets may not be available until September.  Cellphones, according to the company, are a 2014 story, at best.

In other words, the reemergence of INTC as a cutting-edge chip supplier to the post-PC world has been pushed back a year.

2.  During its conference call, the company said it had plenty of money to “defend” the dividend, which I take to be an assurance that the current payout won’t be cut.  Also, even though the company’s stock spent a good part of November and December either right around, or below, the $20 a share level, this weakness didn’t cause INTC to accelerate its share repurchase program.  It ended up buying its typical $1 billion worth of stock, at an average price of $21.20.

Neither of these items may mean anything.  Still, to me they suggest that INTC is thinking its coffers aren’t as bottomless as they might previously have thought and that it has to husband its cash.

3. In its earnings report, INTC presented its current situation, in my view, as something everyone should be fully aware of.  I wasn’t, though.  And the sharp decline in the share price since the call suggests to me that I wasn’t alone.

Although this may be a minor point, I suspect that INTC has a very old-fashioned view of investor relations–thinking that talking to a small group of sell-side analysts means it is reaching the investment community at large.  That model certainly worked when I entered the business thirty years ago.  It’s next to useless today, however.  Odd for a tech company, too, to deliberately dress itself up in old-fashioned clothes.

The result is continuing surprises to investors–and probably a PE multiple a point lower than it would be if INTC embraced the 21st century–or even the late 20th.

my bottom line

I think of INTC as a bit like DIS–a firm where a dynamic new management team has been shaking up a mature business that had become complacent and was gradually losing its relevance.

INTC’s turnaround is taking longer, and is proving more expensive, than I had thought.  The 2H12 industrial slump hasn’t helped matters.

My expectation is that we’ll see an upturn in the PC business in the developing world during the next quarter or two.  The server business should follow suit.  By that time we’ll have more evidence about whether INTC can make any inroads into the tablet market.

For now, I’m content to hold the stock I own.

 

Intel’s 4Q12–waiting for the upturn

January 18, 2013 By in earnings conference calls, Industry Analysis, internet, Recent Market Action, semiconductor manufacturing, Stock ideas, Technology, Wireless Tags: , , , , , , , , , Leave a comment

the report

Yesterday afternoon, INTC reported earnings results for 4Q and full year 2012.  For the quarter, INTC made $.51 per share on revenue of $13.5 billion.  Revenues were down 3% year-on-year, and flat sequentially during a normally seasonally strong quarter.   EPS were off 24% vs. 4Q11.  The profit figures were considerably better, however, than the Wall Street analysts’ consensus of $.45.

For the full year 2012, INTC’s revenues were down by 1% yoy, at $53.3 billion.  EPS were down by 10%, at $2.24.

INTC also gave initial guidance for 2013 yesterday–basically for a not much more than flattish year, with considerably better performance during the second half than in the first.

The stock rose initially as traders saw the better than expected quarterly EPS, only to fall by 5% then they read down the page to the 2013 guidance.  As I’m writing this on Friday morning, INTC shares are down more than 6%.

the details

INTC’s overall business began to decelerate in the second half.  Weakness continued through 4Q.

As worldwide economic growth slowed, corporations responded by cutting spending on servers and PCs.  PC demand from individuals in emerging markets, who had been pillars of strength through the first half, began to sag as well.  Cloud computing everywhere and servers in China were exceptions to this trend.  Weakness was especially acute at the bottom of the PC market.

INTC’s customers spent 4Q working down the inventories of PCs, especially Windows 7 machines, that they already had on hand, rather than buying lots more chips from INTC and making new ones.  Knowing this was likely to happen, INTC shuttered some older production lines earlier than expected and using many of the machines to accelerate development of state-of-the-art 14 nm chips.  These moves (which I think were the right things to do) created one-time changes that whacked 5.5 percentage points from INTC’s gross margin during the quarter (plant writeoffs + startup expenses), clipping about $.10 a share from EPS.

where to from here?

INTC expects an improving world economy to give a boost to its general corporate server business and to its burgeoning PC business in emerging economies as 2013 progresses.

The company also thinks that the personal computing market among affluent individual customers will bifurcate into a large smartphone/7″ tablet market and a second one, consisting of 10″ and larger devices.  It thinks the latter market–ultrabooks, convertibles, tablets–will demand the full speed and computing power of traditional PCs, but in increasingly lighter, thinner, less power-hungry forms   …and that INTC chips will be the only ones able to satisfy these needs.  The first proof of this thesis will likely come late this year.

Significant cellphone market penetration will be a 2014 story, at the earliest.

paid to wait?

That’s the Wall Street cliché about poor-performing high-dividend stocks–that you’re being “paid to wait” for good things to happen.  In the INTC case, I’m content for now to do so.

I must admit, though, that I had expected the good news to be, if not knocking at the door, at least to be walking up the street toward my house, by now.  I don’t think INTC management did much to disabuse me of that view, either.  I don’t mean to say that they misled me;  rather, I suspect this is turning out to be a much longer haul than they expected, too.

Having said that, INTC shares are for me becoming the kind of uncomfortable question that every professional portfolio manager has to deal with sooner or later.  On the one hand, every time you trade you think you know more than the people on the other side of the bargain.  This is somewhat delusional because, on the other hand, experience shows that even Hall of Fame players are wrong at least four times out of ten.

One thing I’ve learned over the years is that if my brain is telling me one thing and the charts are telling me another, the worst decision I can make is to add to a full position (which is what INTC is for me).  The next worst would be to have INTC be one of my two or three largest positions (it isn’t).  So I’m going to sit on my hands for now.

 

 

Intel (INTC)’s $6 billion bond offering

December 6, 2012 By in Dividends, double taxation, Stock ideas Tags: , , , , , , , , Leave a comment

INTC has just filed a prospectus with the SEC for a proposed $6 billion bond offering.  The securities it intends to sell are as follows:

Title of Each Class of
Securities To Be Registered		 Amount To Be
Registered		 Proposed Maximum
Offering Price
Per Unit		 Proposed Maximum
Aggregate
Offering Price
1.350% Notes due 2017 $3,000,000,000 99.894% $2,996,820,000
2.700% Notes due 2022 $1,500,000,000 99.573% $1,493,595,000
4.000% Notes due 2032 $750,000,000 99.115% $743,362,500
4.250% Notes due 2042 $750,000,000 99.747% $748,102,500

Several aspects of this offering are interesting:

1.  INTC says it will use the proceeds for general corporate purposes (this is the boilerplate answer to the use question) and to buy back stock.

The dividend yield on INTC shares at a price of $20 each is 4.5%.  Total interest expense for the offering, ignoring accretion of discount, will likely be $142.875 million, meaning INTC is paying a blended interest rate of 2.38% for the money it will receive.

Unlike dividends, interest payments are a deductible expense for income tax.  After tax, the interest rate is 1.55%.  So for every share of stock INTC buys it will pay out $.31 in annual interest but save $.90 in dividend payments.  So the issue makes INTC’s cash flow go up. A $1 billion buyback at current stock prices would add about $30 million to annual cash flow.

2.  Why an offering now?

A short while ago, INTC boosted its quarterly per share payout to $.225, even though the company knew its new product spending would remain very high through this year.  Companies typically don’t raise the dividend based on future earnings potential;  they do so based on the idea that they have plenty of extra cash, come what may.  In other words, INTC thought it had lots of money to spare.

What’s changed?

–for one thing, the stock price is a lot lower than I would have expected, and the dividend yield is very high.  The chance to buy INTC assets for less than management thinks they’re worth + being paid through dividend savings to do so, the opportunity may have been too good to pass up.  I think this is the main reason for the fundraising.

–INTC’s operations generated over $5 billion in cash during a (relatively weak) 3Q12 alone.  The company also has about $11 billion in cash and short-term investments on the balance sheet.  So why borrow?   …presumably because the bulk of that money is located outside the US.

3.  My initial reaction on seeing the announcement was that problems had developed with planned cash flow in the US.  I don’t think that’s correct, though.  The US has been weak for a while.  It’s emerging markets that have been surprisingly bad for INTC recently.  And those profits presumably remain overseas.

In other words, I don’t think the offering comes as a result of adverse internal cash flow developments.

4.  INTC may be figuring that current low rates won’t last very long.  To me it’s striking that the company is raising 20-year and 30-year money.  Why else do that today?

my conclusion:  I’ve written about confirmation bias recently, partly with INTC in mind.  If I’m suffering from it, INTC’s board is, too.  In any event, the company’s indicated intention to buy back a significant amount of its shares appears to be what’s behind the stock’s current strength.  My guess is that this strength will continue for a while more.

 

Paul Otellini leaving Intel (INTC)

November 23, 2012 By in Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , Leave a comment

Happy Thanksgiving  …a day late

resignation/retirement

Recently, Paul Otellini, CEO of INTC, informed that company’s board of directors that he intends to retire next May.  Stock market reaction has not been positive.  That’s understandable, since one of the key building blocks of the bullish case for INTC is the big change in corporate organization and direction Mr. Otellini created as chairman.  In many respects, his influence is similar to the positive effect Robert Iger has had on DIS.

It’s not 100% clear what’s going on, but there are several things we can conclude with a reasonable degree of certainty.  They are:

1.  This is Mr. Otellini’s decision, not the board’s.  Said another way, Mr. Otellini is not being forced out.  How do we know?  For one thing, Gordon Moore, a current board member and former INTC CEO, said the board tried unsuccessfully to convince Mr. Otellini to stay on for another year.  For another, if there were a problem, Mr. Otellini would never have been allowed to remain until next May.

The most likely reason for the resignation, in my view, is that either Mr. Otellini or a member of his family has developed a health or other personal problem that will require a lot of attention.  I don’t know that this is the case.  Thinking only as an investor in INTC, the exact reason is probably not important, however.

2.  There’s no heir apparent.  Were there a single clear successor to Mr. Otellini, his/her name would doubtless have been announced at the same time as the news of Mr. Otellini’s departure.   Either there’s no obvious internal candidate, or there are several roughly equal, highly qualified possibilities.  In the latter case, the board’s problem is how to promote one while not losing other stars who might leave to become the top person elsewhere.

3.  INTC may look to external candidates.   This may just be the board mouthing platitudes.  If not, it suggests there may be no satisfactory internal candidates.  Or the board may feel the company really needs a new infusion of out-of-the-box thinking.   Given the difficulties tech companies have often had under CEOs brought in from the outside (HPQ is the serial offender here), this is, to me, the most unsettling thing the board has said.

investment implications

For a holder of INTC like myself, the situation bears close watching.

The resignation comes as we’re waiting to see if Mr. Otellini has created enough innovation at INTC for the company to be able to provide a serious alternative to ARM-based chips for mobile devices.  If he has, then the identity of the next CEO is less crucial than if a more fundamental shakeup is still necessary.

The current stock price, which is around my cost, seems to me to be saying that ARMH will continue to run rings around INTC in the mobile arena.

According to Wall Street’s odd logic, either the consensus view is correct–in which case the stock will find it hard to move up, but will keep on paying a high dividend, or it’s not–in which case the stock will likely move up a lot.  As a stock, therefore, INTC would appear to have a load of upside potential and limited chance for loss.

That’s been my thinking all along.  On the other hand, I didn’t expect INTC shares would come anywhere close to revisiting $20, especially in a generally uptrending market.  But it has.

What’s changed in the situation is that with Mr. Otellini at the helm, INTC had a leader capable of making needed changes.  Now we can’t be sure.

For what it’s worth, I’m content to hold my shares awaiting further developments.  I’ve got enough stock that I have no inclination to add more.  If I owned none, would I buy INTC shares at today’s price?  Yes, but not as much as I would have this time a year ago.

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