MorningWord 6/3/13: Every Dog Has Its Day – $INTC

by Dan June 3, 2013 9:29 am • Commentary

MorningWord 6/3/13:  Not sure why, but I wanted to title this post with a reference to a dog I debated using an oldie but a goodie “the sun don’t shine on a sleeping dog’s ass” but I am not sure it is applicable to the topic and not really sure what it means, but it sounded good for a split second.  INTC was highlighted this weekend in Barron’s (read here) suggesting that the company could be on the cusp of a new product cycle that could cause the shares to be re-rated to a have a market multiple of ~15x which could result in a $45 stock next years expected $2 in earnings were able to mysteriously grow to $3 at some point “later in the decade” .  They go on to argue that company’s annual .90 annual dividend that currently yields 3.71% could serve as a decent buffer while the company slowly gains share in tablets and smartphones of which they currently have low single digit market-share.  Here are a few choice excerpts:

Early evidence suggests the company is on the verge of big market-share gains for tablet and smartphone chips. Also on the horizon are stronger sales of server chips, and even a stabilization in personal computers.

Two-thirds of its revenue and a greater percentage of profit come from PCs. It enjoys an 80% market share for desktop chips and an 87% share for laptop chips, but just 1% for tablets and even less for smartphones.

Intel lately has been lifting its spending faster than sales

Last year, Intel spent seven times as much on chip research and development as No. 2 spender Qualcomm. The result could be faster chips, lower power consumption, and lower-cost production than rivals for years to come.

Gains in mobile may win Intel more fans among investors, but they won’t boost revenue massively. Atom chips sell for less than $30, versus more than $100 for desktop and notebook chips, and nearly $600 for server chips

Intel’s $12 billion capital-spending spree will help it reduce manufacturing costs and is winning it a new business line: high-end foundry contracts.

I find it interesting that the article fails to mention the CEO transition and the fact that the prior leadership, which is now the new leadership, missed one of the largest secular shifts in the semi-conductor industry in decades.  The reason the stock was flirting with 3 year lows back in Nov, despite its almost 5% dividend yield, is that investors had been shown little evidence on the product front that the company would be adequately positioned to anytime soon shit focus from desktop/laptop to smartphone/tablet chips.   Barron’s starts the article by stating “evidence suggests the company is on the verge of big market-share gains for tablet and smartphone chips.”Please show us the evidence.

This is not meant to be a hatchet job, and to be honest on more than one occasion in the last six months we have stated that INTC was a bad press on the short side (here & here) given the cheap valuation, strong balance sheet, massive buy-back &  dividend yield, poor investor sentiment and the potential to right the ship.  I guess where I take issue is the author making pie in the sky estimations:

Earnings could top $3 later in the decade, helping the stock attract a higher price/earnings multiple. Applying a market multiple of 15 to $3 of earnings yields a $45 stock. Add five years of dividends, assuming only modest payment growth, and that totals $50, well above the current price.

As a trader I guess I have a hard time reading this sort of prediction after the stock’s 20% rally as I don’t think much has changed over the last 2 quarters and the author could have made nearly the same argument in January.  All in all, I think the likelihood of INTC making progress in mobile is more likely than them continuing to miss the boat, but I am not sure why the company should trade at a market multiple if they are expected to grow earnings and sales for perpetuity at mid single digits.

Stock is up nearly 18% ytd, under-performing the SOX, but crushing the 2.6% gains of QCOM ytd, despite QCOM’s infinitely better positioning in Mobile and higher growth profile (a month ago I did a little comparison of why all Semi stocks are not created equal here).  A disturbing long term technical pattern could be emerging in INTC, the dreaded long term head and shoulders top (below) and how the stock reacts to Q2 earnings and Q3 guidance in mid July could be instructive whether we get a re-test of the $20 neckline or the stock establishes a new range above $25.

INTC 5 year chart from Bloomberg
INTC 5 year chart from Bloomberg

I remain fairly neutral on the stock as it remains a show me story, but given the recent rotation into cheap cyclicals, and the fat yield , the stock remains a difficult stock to fade on the short side.  I would be inclined to be a buyer back towards $20 on any broad market weakness or a reset to earnings expectations.