Trade Update INTC: Rating Downgraded at JPM

by Dan January 17, 2012 8:03 am • Commentary

6th Update Jan 17th, 2012 at 9:33am: sold more at 25.26, average around 25.18

5th Update Jan17th 2012 at 9.10am:  This maybe a bit aggressive but i am shorting a little INTC pre-open at 25.10. I will look to add to this position on any strength throughout the morning.  As I stated below, I had nice gains on a portion of my Jan 24/22.5 Put Spread from mid December, but now the Jan 24 Puts that I still own are a good bit out of the money.  This is a short term trade and would likely cover prior to earnings if the stock sells off and will look to roll the puts out a bit.

4th Update Jan 17th:  This morning JPM downgraded their rating on INTC from Overweight to Neutral.   I am highlighting this call, not because I think this analyst has a special axe in the name, but I find the timing interesting, 2 days before the company is set to report Q4 earnings.  After reading through the note I don’t get a sense that the analyst is making a call on the quarter, in his own words, “the reasons we upgraded the stock have run their course, we believe INTC’s margins are peaking and we are seeking more leverage in other semiconductor stocks”.  Here are a few more highlights of the downgrade:

Intel margins peaking – stock follows gross margins. We expect Intel’s gross margins to decline roughly 190 basis points YoY from the peak of 62.5% in C11 to 60.6% in C12 and C13 due to higher depreciation and weaker pricing. As we state in Rule 7 of our Top-Ten Rules of Semiconductor Investing, Intel’s stock performance usually follows its gross margins.

Intel the only semiconductor stock without a major EPS cut… Intel is the only semiconductor stock without a major EPS cut. Intel’s Consensus C12 EPS estimates have only been cut 3% from its peak of $2.47 to the current estimate of $2.39, well below the average cut of 26% for our semiconductor universe. The stock is up 17% since last April, 20% ahead of the S&P.

…and has among the least EPS growth in 2013… Our analysis indicates Intel only has 9% EPS growth in 2013, below the average 20% of our coverage universe due to peaking margins. Our C12 and C13 EPS estimates are roughly 15% below Consensus.

…so we seek more upside elsewhere. We prefer TXN, ADI, XLNX, and ONNN as all have margin and EPS upside above the universe average.

Not getting into tablets or phones in meaningful way. Although Intel is making inroads into tablet and smartphones, we do not expect it to have a material impact to its earnings. We believe Intel is at a disadvantage to ARMbased chips in three key metrics of mobile computing: power, cost and software.

Strong dividend and execution, but not enough for OW. INTC stock has a 3.3% dividend yield, well above the S&P 500 average of 2.0%, and its execution in both PC processors and returning cash to shareholders have been exemplary. However, we are becoming more aggressive in our stance on semiconductors and desire for leverage and Intel’s leverage appears to be peaking.

Valuation. INTC is trading at roughly 11X our C13 EPS estimate, a slight premium to its peers such as IBM, HPQ, MSFT, and CSCO. We are maintaining our December 2012 price target of $25.00, or 11X our C13 EPS estimate and downgrading INTC from Overweight to Neutral

MY TRADE:  For those who can remember that far back, I bought the Jan 24/22.5 put spread for .35 in early December in front of TXN’s mid quarter update and got lucky with INTC’s pre-announcement.  I sold half of the position for a double and then when the stock rallied back from $23  to $25, I covered the 22.5 puts and then bought more of the Jan 24 Puts.  With 2 days till the earnings event I will look to add to this position, but possibly looking out to February.  Obviously at this point a weak Q4 is “baked into the cake” and Q1 guidance will be the driver for the stock.  While JPM’s analyst’s is not making a call on INTC’s quarter his thoughts about margins peaking may be very instructive to sentiment in the name going forward.



3rd Update Jan 5th 2012 at 2pm: Doubled my position (stock ref 25.40) in the Jan 24 puts paying .15, averaging down not a great habit to get into, but these Puts are getting $ cheap to me…..low risk, potentially high reward if company guides down for Q1.

2nd Trade Update Jan 5th, 2012: With the stock back above 25.00 (ref 25.08) at the level that I put the trade on back on Dec 5th, and 2 weeks to the company’s Q4 earnings report I am going to look to manage this trade a bit.  A few days after the company pre-announced worse than expected results for their Q4, I took off half of this spread for a gain that equaled a double of the .35 that I initially paid for the spread. [private]

Now with the Jan 24/22.5 Put Spread only worth about .17, I am going to cover the Jan 22.5 put for .04 as it is only a 5 delta option and I am going to take some of the winnings on the first half of my position and redouble my efforts on the short side and buy back some of the Jan 24 Puts for .21.

The company already gave us half the news of their Q4 miss, so the real question will be Q1 guidance, At this point I am willing to place some chips back on the table that Q1 guidance will be less than stellar and possibly see a move back to the lows of mid December close to $23.

Trade Update Dec 14th 2011:  Since putting this trade on last Monday (stock Ref 25.05) , the trade has worked out as planned…I wanted to get short exposure for the following reasons: I thought the stock was extended, any bad news out of TXN in their mid qtr update would be extrapolated to INTC and I thought there was a good chance that they pre-announced negatively.   Well all of that has happened and the stock is down about 8% at 23.22.  The Put Spread that I paid .35 can now be sold at .71 for a double.  You guys Know the drill, I am taking my cost off of the table and will let the other half ride.



Original Post Dec 5th, 2011:  INTC: Not All Semiconductors Stocks Were Created Equal in 2011: Shorting ‘Best Of Breed”

Semiconductor stocks have been one of the most divergent groups within the Technology stock universe this year.  The SOX is down about 31% ytd, while the Nasdaq is basically flat on the year.  There is also a significant divergence within the SOX where stocks like INTC ( ~9.5% of the index) is up almost 20% ytd, while stocks like BRCM are down about 30% ytd with a weighting of about 6.5% of the index. In fact out of the top 10 stocks in the index that make up about 57% of the Index of 30 stocks, only 4 are up in any meaningful manner.

The chart below shows the haves and the have nots within the SOX, INTC one of the few stocks up more than 5% in the entire index, while once high flier BRCM is down close to 30%.

SOX vs INTC vs BRCM 1 yr chart from Bloomberg


I think something has to give in INTC and feel that there is a decent chance due to weakness in Europe and a slowing economy in China that INTC may need to back off on their Q1 guidance as Q45 might have been a tad worse than they gave guidance in mid Oct.  INTC has confirmed its Q4 reporting date for Jan 19th which falls in Jan expiration, but I think there is a decent chance they could actually pre-announce negatively if December proves to fall flat for orders, something the disruption in Europe could clearly cause.  Up until a couple years ago INTC used to hold mid quarter updates this week of the quarter, they don’t anymore, but any disappointment out of TXN”s mid qtr update this Thursday afternoon could cause some weakness across the space. So here’s the trade:

TRADE: INTC ($25.05) Bought the Jan12 24/22.5 Put Spread for .35

-Bought 1 Jan12 24 Put for .65

-Sold 1 Jan12 22.5 Put at .30

Break-Even on Jan12 Expiration:

-Profits btwn 23.65 and 22.50 make up to 1.15 (or a little more 3x your money),  22.5 or below make full .35

-Losses bwtn 23.54 and 24 lose up to .35, and above 24.00 lose all .35 or ~1.5% of the underlying.

Technically the stock is trading at levels not seen since before the start of the financial crisis and I am not sure that even its earnings multiple of 10x can support the expected 5% sales and earnings growth next year.

The stock has tried now on 3 occasions of late to get through the $25 level and on the last 2 the stock was met with sell offs of 5 and 10% respectively.  I don’t believe INTC can continue to hold the inevitable collapse of the SOX.

3 YR INTC chart from Bloomberg