Intel (INTC) this morning

I woke up this morning to see a flood of news reports about across-the-board salary cuts for senior people at INTC (this is a stock I think I know something about but haven’t had a position in for years). I looked for a press release on the company website. Nothing. It looks like engineers groused to reporters, who then called INTC to verify before releasing their articles. My guess is that the company just didn’t want to address the issue during its earnings call on January 26th.

The stock is up slightly in a flattish market as I’m writing this, implying that this is either old news or Wall Street doesn’t think it’s important.

I went back to the earnings call transcript, whose jargon had caused me to quit halfway through, and read it to the end. Lots about expense control and the extra-large customer chip inventories that will take the first half to work through, nothing specific about salary cuts.

There was something that I’d missed that popped out to me the second time through, though. INTC has suddenly worked out that assets whose value it had been expensing in its financial reporting over a five-year useful life (i.e., 20% of the purchase price a year) actually should be depreciated over eight years (or 12.5% per year). This has nothing to do with the actual flows of cash in and out of the company or the tax it pays to the IRS. It’s all about optics in reports to shareholders.

In 2023, for example, INTC spends $25 billion on new capital assets. If all of that were subject to the old rubric, the company would have written off 20%, or $5 billion, as an expense on the income statement. Under the new company rules, INTC would expense $3.1 billion instead. Same IRS results, same cash in/out of the company, but pre-tax income would be almost $2 billion higher.

I have mixed feelings about this. In the before times, when I was learning the analyst trade, this would be a sure sign of management weakness. Given that trading bots may not read the fine print on accounting conventions and instead react to the eps figure without a thought to earnings quality, maybe this is a prudent protective measure. Could also be there’s some obscure financing covenant that requires a minimum level of eps.

One other thing: INTC says it aspires to cut another $7 billion out of operating expenses over the next year or so. Given that the company pays about $6 billion a year in dividends, that goal could be achieved almost immediately. The company has gone out of its way to say it will maintain a dividend, however. But the wording of this promise is, I think, carefully crafted. INTC isn’t saying it will maintain a dividend at the current level, as I read it–only that it will pay something.

more inventory problems

Last spring, retailers Target and Walmart both announced that they were having inventory problems. There were two aspects to the issue: too much stuff, and the wrong kind of stuff to appeal to consumers who had suddenly decided the pandemic was over.

The companies faced two problems with the inventory they had: how to get the unwanted merchandise off the selling floor (and where to put it, once it was gone), and how to get back the money they had tied up in the inventory, either by resale or return. (A side note: my guess, which I haven’t tried to verify, is that during the time of supply constraints, merchants pretty much gave up the right to return unsold merchandise. So turning the gods back into cash mostly meant selling it at a discount). The big trick in doing this is to get the right balance between getting the most money while minimizing the risk that the merchandise goes out of style or is surpassed by newer, better versions.

My sense is that this inventory adjustment is mostly done.

What’s replacing it as a stock market worry is the situation of the producers of stuff that sold like hotcakes during the pandemic. For such manufacturers, demand is returning to normal. This is somehow taking both Wall Street analysts and at least some of the companies themselves by surprise. For example:

Hasbro (HAS), for example, reported overnight. EPS were lower, on sales of traditional toys slowing down. It also appears that the executive in charge of this part of the business has been asked to leave. If so, this suggests top management may have realized the implications of WMT/TGT but other managers decided not to slow production down. HAS was down by about 6% in the aftermarket but has trimmed the decline to -5% as I’m writing this.

Intel (INTC) reported, as well. In a jargon-filled presentation, the CEO basically said the same thing. Sales of the company’s chips for PCs and servers have both been weaker than expected, and are likely to remain so through mid-2023. In this case, the decision to slow down production on the signals customers were sending out may be more complex. Given it takes about three months to fabricate the most advanced semiconductors, keeping production going, not pulling back may have been the profit maximizing (meaning loss minimizing) solution. Also, given the substantial ground INTC has lost to competitors over the last half-decade, management may have thought having inventory on hand may have been more crucial than it might have been if INTC had more market power. Still, INTC was down by about 9% overnight, and is -7% as I’m writing.

What I find most interesting is that announcements like these still have the power to shock. But this is mostly due, I think, to my not having completely adjusted to the fact that stock market trading is controlled by fast-reacting but relatively mindless trading bots.

For anyone knowledgeable, and bullish, about the stocks involved, it seems to me the right tactical decision would be to buy on this weakness. Ignorant, I’m happy to stay on the sidelines, though, rather than dabble in either.

more on Twitter

The Wall Street Journal reported yesterday that Twitter held discussions last month with outside investors about a possible new $3 billion equity raising, apparently at the same $54.20/share price he paid for the company earlier last year.

It’s not clear whether this is new news or elaboration of stories about an equity raising that were circulating a few weeks ago. Several things about the article, which Elon Musk has tweeted is not 100% accurate, are interesting, though:

–no successful offering has been announced, suggesting that even Twitter/Musk fans find the $54.20 price too steep. Is a lower offering price possible? Hard to know, since it’s possible Musk has either formal or informal agreements with backers to protect them against dilution of their holding, that is, that is, that he won’t sell new shares below the $54.20 price

–the WSJ says Fidelity has written down the value of the Twitter shares it bought as part of the Musk takeover from $54.20 each to a bit less than $25. This would make it doubly hard for any fiduciary (someone who isn’t friends/family of Musk) to pay more

–the proceeds of an offering would presumably go to redeem a $3 billion variable interest rate bridge loan. This loan has an escalating interest rate that appears to me to be 14.5% now and will rise to something like 16% by the end of its first year. If I’ve read the offering document correctly (no guarantee I have), this loan turns into a seven-year, non-prepayable term loan if it is not repaid during year one. That would be over $3 billion in total interest payments locked in

I wonder, too, what effect Musk’s Twitter problems may have on the brand image of Tesla. There’s the possibility that the Twitter turnaround won’t go well, tarnishing his image as a quirky but ultimately savvy businessman. More important, I think, is a newspaper article that popped up in my email yesterday, expressing outrage at the list of anti-semitic hate writers who have been allowed back on Twitter. Not a good look for someone wanting to sell cars to the general public.

stuff

I came across an interview of an academic expert on China in the NY Times. It follows more or less the same line as my recent comments. It is, however, much more forceful about the idea that Xi called off the punishment of non-Party-member tech entrepreneurs late last year.

MSFT, ASML and TXN all reported overnight (I own both of the first two). MSFT was up by about 4% …until the conference call began, in which the company said in effect that the post-pandemic business slowdown is nowhere near over. The stock is down by 4% in early trading. ASML had a strong quarter and said business will be up by 25% or so this year. Its stock is down slightly. TXN said things are unusually weak. Its stock is down by about 2% as I’m writing this.

I find it hard to find a consistent narrative in all this.

I was flipping through sports show talking about the football playoffs while I was having lunch yesterday. I was struck by how, the moderator aside, the panels were made up almost entirely of highly knowledgeable and articulate former professional players and coaches. At times, the conversation turned to the esoterica of player-by-player analysis of the offensive intention behind the construction of a play and how defenders understood (or not) and reacted to the design.

Then I turned to CNBC, which is chock full of “personalities” who have never had meaningful roles in professional money management of any sort but pretend to have industry expertise. The difference between the two genres is stunning.