Intel’s 4Q12–waiting for the upturn

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.



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