Monthly Archives: October 2012

Intel’s 3Q12: softness continues

October 17, 2012 By in earnings conference calls, Industry Analysis, internet, semiconductor manufacturing, Stock ideas, Technology, Wireless Tags: , , , , , , , , , Leave a comment

results

After the close of equity trading in New York yesterday, INTC reported its 3Q12 earnings results.

Revenues were flat, quarter on quarter, at $13.5 billion, during the typically seasonally stronger 3Q.  The same with operating expenses.

EPS came in at $.60 vs. $.57 for 2Q12, based largely on a lower than expected tax rate (implying to me that business was stronger than expected in emerging markets, weaker in the US and EU).

The numbers were considerably better than the downward revision to guidance that INTC announced in early September.  At that time INTC expected revenue of $13.2 billion and EPS (my estimate) of $.52-$.54 (see my post on the pre-announcement).

Year on year, results were down.  3Q11 revenues were $14.2 billion, EPS $.65.

The stock fell about 3% in the aftermarket Tuesday.  In the Wednesday premarket, it’s about the same, while S&P futures are flat.

details/guidance

details

Demand for PCs in the US, EU and China continues to be lackluster.  As a result, INTC’s customers, the machine manufacturers, continue to pare chip inventories.  This is typical behavior:  the buyer gets the sniffles, the component manufacturer gets pneumonia.   But INTC customers appear to be shrinking inventories to even lower levels than the company anticipated a month ago, implying their ability to read end-user buying intentions is especially low.

Business did pick up a bit in September in anticipation of Windows 8.

Demand for servers from corporations has also begun to slow down, as company cash flows flatten out due to the current deceleration in global economic growth.  This is a new element in the INTC story, although not a huge surprise.  No matter what anyone says–including the companies–corporations usually don’t borrow to fund capital expenditures.  Spending is a function of the cash flows that operations generate.

Cloud computing remains very strong.

guidance

Visibility is very low.

INTC appears to expect that 4Q12 will more or less mirror 3Q12.  The company normally keeps inventories of just over a month’s sales.  It now has 5%-10% too much.  It will slow down manufacturing a bit during 4Q12, as a result.  This won’t affect revenues.  But the company will shut some production lines and shift the machinery to new leading-edge uses.  This will mean lower capex during the quarter, as well as an unspecified amount of equipment writedowns.

During 1Q13, INTC will begin another of its bi-annual production upgrades–which will mean lower gross margins by a few percentage points for a quarter or two as the company gets the new lines up to speed.

earnings guesses

I’m pencilling in $.60 (excluding writedowns) for 4Q12, which would mean full-year EPS of $2.33.  I’m thinking that 2013 will bring a minimum of $2 a share, with $2.50+ likely if the global economy begins to reaccelerate.

the stock

Since the bottom for the S&P in June, the index is up about 14%.  Over the same time span, INTC is down by 14%.  Most of the damage has happened since mid-August, when the global slowdown became more apparent.

At $22 a share, INTC is trading at 9x trailing earnings and at, I think, at most 10x what it can earn in 2013. INTC shares now yield 4%, a full percentage point above the 30-year Treasury.

I’m surprised that the stock has performed as poorly as it has.  I’d thought INTC might give up some of its run to $29+, but I’d expected it to settle in around $25 or so.

That’s clearly been wrong.  And it’s always a danger signal when a stock doesn’t do what you expect.

As far as I can see, the current earnings weakness has revived all the old fears that INTC products have no place in a post-PC world dominated by tablets and smartphones.  And this, rather than business-cycle softness, is what’s causing the sharp underperformance of INTC shares.

It’s possible that the negative scenario will turn out to be true.  I continue to think, however, that INTC shares are now being priced as if that outcome were a certainty–that ultrabooks and INTC’s forays into tablets and smartphones won’t be successful.  So I’m continuing to take the contrary bet–noting, though, that there are risks in saying that everyone’s out of step but me.

Macau casino gaming, September 2012

October 16, 2012 By in Asian economic development, Casinos, China, Current Market Thoughts, economics, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , 1 Comment

September gambling results

Earlier this month, the Macau government’s Gaming Inspection and Coordination Bureau released its monthly report of gaming “win” for the SAR’s casino industry.  The figures are as follows:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2012 and 2011
Monthly Gross Revenue Accumulated Gross Revenue
2012 2011 Variance 2012 2011 Variance
Jan 25,040 18,571 +34.8% 25,040 18,571 +34.8%
Feb 24,286 19,863 +22.3% 49,325 38,434 +28.3%
Mar 24,989 20,087 +24.4% 74,314 58,521 +27.0%
Apr 25,003 20,507 +21.9% 99,317 79,028 +25.7%
May 26,078 24,306 +7.3% 125,395 103,334 +21.3%
Jun 23,334 20,792 +12.2% 148,729 124,126 +19.8%
Jul 24,579 24,212 +1.5% 173,308 148,337 +16.8%
Aug 26,136 24,769 +5.5% 199,444 173,106 +15.2%
Sept 23,866 21,244 +12.3% 223,310 194,350 +14.9%

Source: Macau DICJ

Initially the Hong Kong stock market took the September figure of 23.9 billion patacas (US$3.1 billion) as disappointing.  For reasons best known to themselves, the consensus of Hong Kong gambling industry analysts had been that revenue should be up by 17% (I have no idea why they were so bullish).  As a result, on the day of the report the stocks all sold off.  But they rallied back the next day, as the market began to look at the accelerating pattern the year to year comparisons appear to be establishing over the past three months.

October as a key

October, which contains Golden Week–normally the period of the highest demand for gaming during the year–will be important to monitor.

October 2011 gaming win was 26.9 billion patacas, a 26% month on month increase over normally weak September.  I would take a gain of 15%+ for October this year as a signal that the market has already hit bottom and is on the mend.

an important time

In my view, the Macau gaming market is at a crucial juncture, one that participants in capital-intensive industries dread.  Casino capacity has expanded to the point where it, at least temporarily, outstrips demand.  How so?  A number of big new casino projects, started several years ago, have been coming on-line just as economic slowdown in China is putting a crimp on high rollers’ desire to gamble.

I think the casino operators and the Macau government have been reacting to the situation in an unusually sensible way.  New casino approvals have dried up.  Operators have been stretching out the timetables for already initiated projects–Sands China, for example, has already paid a penalty to the government so it can postpone by a year the opening of its latest Cotai expansion.  At the same time, casino companies have used the current period of extraordinarily low interest rates to lock in their project financing on favorable terms.

It seems to me, therefore, that intra-industry dynamics are not the big worry they would be in, say, the cement or paper or high-rise building construction.  The most important steps to stimulate global economic recovery are already being taken.  So holders of Macau casino stocks (like me) are simply waiting for evidence that will show the timing of the market’s rebound.

My thought has been that a significant pickup in demand will be a 2013 phenomenon, not a 2012 one.  I’m not yet willing to act, but the pattern of recent yoy market win comparisons suggests to me I may be being too pessimistic.

looking at corporate cash balances

October 15, 2012 By in Academic Theories, Dividend Discount Model, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , , 2 Comments

AAPL as a model global company

Many publicly-traded US companies have huge cash balances relative to their stock market value.  AAPL is a good example.

The company had just short of $120 billion in cash plus marketable securities on its balance sheet as of June 25th.  That’s about 20% of the stock’s total value at last Friday’s close.  Let’s say 80% of that cash is held overseas in countries that levy little or no tax on corporate earnings.

Like many global companies, AAPL’s tax rate–25.3% during the first nine months of its current fiscal year–is substantially below the 35% statutory rate in the US.  (Yes, the US rate is much higher than in the rest of the world.  Yes, a good part of the reason for AAPL’s lower rate is that it earns money abroad that it declares to be permanently invested overseas and therefore doesn’t repatriate to the US.)

analytic issues

Today’s dominant stock market view is that cash is cash, no matter where it’s located, and that earnings are earnings, no matter how lightly they’re taxed.

In contrast, when I began working on Wall Street in 1978, attitudes about recognizing earnings in low-tax areas and about holding cash balances there were far different from what they are today.

Specifically, in those days, investors in the US mentally subtracted from cash balances the home country tax that would be due if the money were to be repatriated and used for shareholder dividends or domestic capital expenditure.

In the UK, brokerage house analysts went further than that.  They did that work for you. Their written recommendations commonly contained, in addition to actually reported earnings, the same numbers “normalized” as if the firm had repatriated all foreign earnings and paid a full tax rate.  Brokers gave their estimates the same dual treatment.

two views:  what’s the difference?

cash

This is pretty straightforward.  For profits on business concluded by a US company in, say, Hong Kong, the corporate tax rate is zero.  If the firm wants to distribute this money as dividends, it first has to be sent to the US, where it is subject to the 35% Federal corporate tax–and possibly to state tax as well.  If this possibility is all an investor is concerned about–cash in his hands rather than in the company’s (a view the dividend discount model explicitly endorses/encourages), then foreign cash balances are worth substantially less than domestic ones.

Figuring out how much less is more difficult,  That’s because a company gets a credit against tax due to Uncle Sam for any tax paid to the foreign country.  To make a stab in the dark, AAPL’s cash pile is probably worth $20 billion less to our totally dividend oriented investor than its balance sheet carrying value.

On the other hand, if you have faith in company management to maximize the value of the corporation, you’re probably willing to believe that holding the cash balances abroad is the best use of the money.  Maybe the funds are being earmarked for reinvestment there, either through purchase of capital equipment or maybe an acquisition.

So you’re less worried about the fact that the money is in a foreign bank.  You’d also think it would be crazy to repatriate the cash, lose a large chunk to taxes, and the ship the funds back out of the US to pay for foreign expansion.

earnings per share

AAPL’s corporate tax rate for the first nine months of 2012 is 25.3%.  If its pretax total were subject to tax at 35%, eps for AAPL would be about 15% lower.

Another way of saying the same thing is that if we adjusted the AAPL PE multiple to reflect a full US corporate tax rate, it would be about two PE points higher.

why write about this?

As I mentioned above, conventional wisdom is that these distinctions don’t matter.  But this is an expression of investor preferences or “taste,” as academics might put it.  And these are subject to change.  After all, these preferences were substantially different a few decades ago.

My reason for writing is that I think preferences are starting to change again.

Maybe it’s the more subdued state of world economic growth.   Maybe it’s the aging of the Baby Boom and that cohort’s increasing interest in dividends.  Maybe I’m just wrong.  But I think that investors are beginning to become more aware of differences in taxation of profits and of the geographical location of corporate cash.

Consequences?

If so, companies sporting low corporate tax rates– predominantly ones with emerging markets exposure, in my view–may be subject to a lot more backing and filling than is commonly thought as the market discounts the possibility that they’re more expensive than they seem.

Guinness

Wal-Mart and banking: the Bluebird card

October 11, 2012 By in Banks, Industry Analysis, Stock ideas Tags: , , , , , , , Leave a comment

the “unbanked” or “underbanked” population

About a quarter of all Americans are either “unbanked”–that is, they don’t use conventional banking services at all–or “underbanked,”  meaning they may have either a checking or savings account but regularly use check cashing stores, pawn shops and other non-traditional banking services.  About 8% of the population is in the unbanked column, about 17% is underbanked.  (You can find more details in this PSI post.  The situation hasn’t changed since I wrote it.)

Why no bank accounts?  

The un/under population finds conventional banking services too expensive and bank locations not  convenient.  Of course, until very recently banks have been totally uninterested in this market segment, despite frequent Congressional prodding to be friendlier.

The situation has long been a problem/challenge/opportunity for WMT, because a large chunk of its customers fall into the un/under category.  There are two aspects to this:

–lacking a checking account or a debit card, the un/under generally find it hard to make money transactions, and

–if we estimate (read: make up a number) that conventional banking services cost at minimum $500 a year, then check cashing stores et al can (and do) charge $400 a year and still be a bargain.  Not good for un/unders, but basic microeconomics.

That’s not all.  Forbes has a good recent article on exploitative “celebrity” prepaid cards, which can end up costing a bundle.

That’s all cash that could otherwise be spent in WMT stores.

WMT can’t be a bank

Years ago it tried.  Despite the company’s unique position to serve the un/under community, furious lobbying both by banks and other retailers caused Washington to deny WMT’s banking application.

it’s turning to AMX for a prepaid card…

…one that will have very low fees.

The card, called Bluebird and bearing the American Express name, will be sold both by AMX online and in WMT stores.  It doesn’t require that you have a checking/savings account;  you just load cash into the card and use it.

WMT should benefit in several ways:

–its un/under customers will have more money to spend

–the service will doubtless make them more loyal to WMT

–it may attract new traffic to its stores, and

–WMT will presumably get a ton of information about card users shopping habits.

investment implications?

I’m not sure that, by itself, the Bluebird card is a reason to buy WMT shares.  They’ve already performed very well recently as domestic economic recovery has gradually widened to include ordinary Americans.  But as one of a number of positive measures from new management, Bluebird has put WMT back on my radar screen.