Intel’s 1Q13–another transition quarter

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.


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.

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