Category Archives: semiconductor manufacturing

Intel’s 1Q13–another transition quarter

April 19, 2013 By in earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , Leave a comment

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.

details

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.

Intel’s 4Q12–waiting for the upturn

January 18, 2013 By in earnings conference calls, Industry Analysis, internet, Recent Market Action, semiconductor manufacturing, Stock ideas, Technology, Wireless Tags: , , , , , , , , , Leave a comment

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.

 

 

Paul Otellini leaving Intel (INTC)

November 23, 2012 By in Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , Leave a comment

Happy Thanksgiving  …a day late

resignation/retirement

Recently, Paul Otellini, CEO of INTC, informed that company’s board of directors that he intends to retire next May.  Stock market reaction has not been positive.  That’s understandable, since one of the key building blocks of the bullish case for INTC is the big change in corporate organization and direction Mr. Otellini created as chairman.  In many respects, his influence is similar to the positive effect Robert Iger has had on DIS.

It’s not 100% clear what’s going on, but there are several things we can conclude with a reasonable degree of certainty.  They are:

1.  This is Mr. Otellini’s decision, not the board’s.  Said another way, Mr. Otellini is not being forced out.  How do we know?  For one thing, Gordon Moore, a current board member and former INTC CEO, said the board tried unsuccessfully to convince Mr. Otellini to stay on for another year.  For another, if there were a problem, Mr. Otellini would never have been allowed to remain until next May.

The most likely reason for the resignation, in my view, is that either Mr. Otellini or a member of his family has developed a health or other personal problem that will require a lot of attention.  I don’t know that this is the case.  Thinking only as an investor in INTC, the exact reason is probably not important, however.

2.  There’s no heir apparent.  Were there a single clear successor to Mr. Otellini, his/her name would doubtless have been announced at the same time as the news of Mr. Otellini’s departure.   Either there’s no obvious internal candidate, or there are several roughly equal, highly qualified possibilities.  In the latter case, the board’s problem is how to promote one while not losing other stars who might leave to become the top person elsewhere.

3.  INTC may look to external candidates.   This may just be the board mouthing platitudes.  If not, it suggests there may be no satisfactory internal candidates.  Or the board may feel the company really needs a new infusion of out-of-the-box thinking.   Given the difficulties tech companies have often had under CEOs brought in from the outside (HPQ is the serial offender here), this is, to me, the most unsettling thing the board has said.

investment implications

For a holder of INTC like myself, the situation bears close watching.

The resignation comes as we’re waiting to see if Mr. Otellini has created enough innovation at INTC for the company to be able to provide a serious alternative to ARM-based chips for mobile devices.  If he has, then the identity of the next CEO is less crucial than if a more fundamental shakeup is still necessary.

The current stock price, which is around my cost, seems to me to be saying that ARMH will continue to run rings around INTC in the mobile arena.

According to Wall Street’s odd logic, either the consensus view is correct–in which case the stock will find it hard to move up, but will keep on paying a high dividend, or it’s not–in which case the stock will likely move up a lot.  As a stock, therefore, INTC would appear to have a load of upside potential and limited chance for loss.

That’s been my thinking all along.  On the other hand, I didn’t expect INTC shares would come anywhere close to revisiting $20, especially in a generally uptrending market.  But it has.

What’s changed in the situation is that with Mr. Otellini at the helm, INTC had a leader capable of making needed changes.  Now we can’t be sure.

For what it’s worth, I’m content to hold my shares awaiting further developments.  I’ve got enough stock that I have no inclination to add more.  If I owned none, would I buy INTC shares at today’s price?  Yes, but not as much as I would have this time a year ago.

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.

Intel (INTC) preannounces weaker than expected 3Q12 results

September 11, 2012 By in Current Market Thoughts, earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , , , , Leave a comment

the INTC preannouncement

INTC intends to announce 3Q12 results on October 16th.  But it already knows that its earnings will fall below its previous guidance by a substantial amount.  So, while the company still has to dot the is and cross the ts, it issued a short press release stating this on September 7th.

INTC now expects 3Q12 revenue to be $13.2 billion rather than $14.3 billion, and for its gross margin (that is, its profit margin after subtracting all direct costs of making its products) to be 62% of sales rather than 63%.  Basically, all other costs remain the same.

By my back-of-the-envelope calculation, this means INTC will likely report 3Q12 eps of $.52-$.54, rather than the $.63-$65 or so it had been expecting when it issued its guidance two months ago.  3Q11 eps?  …$.69, on revenue of $14.3 billion.

what’s going on?

The unofficial (though pretty much binding, nonetheless) protocol for such announcements is to list the reasons for the earnings revision in order of importance, with the most important going first.  That would mean:

1.  customers worldwide are not fully replenishing their stock of INTC chips as they sell products containing them.  This is a standard response to weakening demand, especially if PC manufacturers believe they can quickly get supplies if needed.  Let INTC hold the inventories, not them.  Therefore, slower economic activity is resulting in lower sales.

A reasonable guess is that INTC’s 8% slide in sales vs. its prior expectations breaks out into 4% due to weaker end-user demand and 4% defensive behavior by PC makers.

Operating leverage is making the bottom line look considerably worse.

2.  one customer group sticks out:  corporations are slowing their replacement of employees’ aging PCs (but not their spending on servers or on the cloud).

This almost goes without saying.  Corporations rarely outspend their cash flow. If they sense cash flow contracting, they cut discretionary spending.

3.  one geographical area does, too:  slowing demand in emerging markets (which had been a pillar of strength earlier in the year).

Presumably the supply chain is longer in emerging markets than in developed ones, as well as harder to get good information about.  So the slowdown in end-user demand may have been going in somewhat longer in emerging markets than in developed.

To recap, my interpretation of the release is that global economic weakness is the main cause of the preanouncement.  Emerging market slowdown is a factor worthy of note, but the least important of the three elements cited.  Windows 8 isn’t really an issue, since INTC had already accounted for a pre-release buying pause in its previous guidance.

the stock is down almost 8%…

…since the INTC announcement.  As an owner of the stock, I’m not happy.  As an observer of the stock market, I think the selloff is overdone.  But it’s not entirely crazy, either.  I regard INTC as a “show me” stock in the high $20 range.  At, say, $27-$28, I think the “old” INTC business of selling mostly PCs is fully valued.

For the stock to break into $30-land, I think it has to demonstrate some success in penetrating the mobile market–smartphones and tablets.  If you think INTC has no shot–and I think that’s the consensus among Wall Street analysts and the media–the stock is mildly undervalued today, but that’s all.

On the other hand, if you think INTC has a reasonable chance (that’s my opinion) you get the possibility of some upside, a low-risk option on substantial upside if INTC’s newest chips crack the mobile market, plus a dividend yield above 3% while you wait.

Although it sounds odd at first, it’s also possible that the current slowdown is good for INTC, if it buys extra catchup time to get the company’s 14nm chips on the market.

a case of operating leverage

That’s my topic for tomorrow–how this situation presents a good analytic opportunity to see operating leverage analysis in action.