more thoughts on Intel (INTC)

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.


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