New Trade $INTC: Semi Decent Results on the Surface

by Dan October 15, 2014 10:28 am • Commentary

After the bloodbath last week in semiconductor stocks on Microchip’s downturn warning Thursday evening, one would have thought that Intel’s (INTC) beat and raise last night should have provided some solace to investors.

At first blush, I thought the company’s slightly better than guided gross margins, 10% earnings growth and 8% sales growth were okayyy, not bad in a tough environment.  But earnings growth of 10%, just a tad better than sales growth, with the HUGE step up in share buybacks made me think again.

Per INTC’s release:

-Cash flow from operations in the third quarter was approximately $5.7B

-During the third quarter, we paid approximately $1.1B in dividends, purchased $2.4B in capital assets and repurchased $4.2B in stock.

It’s worth noting that a large portion of the stock’s buyback has historically been to offset is high level of employee stock compensation.  Even in the latest quarter, when the company stepped up repurchases, around half of the buyback went towards offsetting employee stock, and did not reduce the total share count.  In other words, the large buyback is not quite as big as it seems at first glance.

As for the business, more of the same, servers strong, notebook and desktop pricing poor and mobile a disaster. I have heard some market pundits of late cite design wins in mobile and software/security as reasons to remain bullish on the stock.  I wholeheartedly disagree. I think that on the slightest sign of a pc/server downturn these groups could cause a bit of pain and drag down earnings.

On mobile, INTC continues to LOSE a ton of money, to the tune of $1 billion this quarter, and these appear to be growing as they were $810 million a year ago and $1 billion last qtr.

As for security, Macafee, that’s a joke.  INTC reported “Software and services operating segments revenue of $558 million, up 2 percent sequentially and up 2 percent year-over-year.”  Put another way, 3% of the revenues in the quarter and I doubt it was all security software from Mcafee.  So my point is, don’t buy INTC because you hear a bull cite the potential for tremendous growth in this hidden gem.  Frankly I am surprised investors have not called for them to spin it out and do their best to get a portion of their $7.7 purchase price for the company back in 2010.

I want to make a near term bearish trade that isolates this morning’s low below $30, and targets a near roundtrip of the move from June:

Trade: INTC ($31.22) Bought Nov 31/ 27 Put Spread for 1.05

-Bought to Open 1 Nov 31 put for 1.30

-Sold to Open 1 Nov 27 put at .25

Break-Even on Nov Expiration:

Profits: between 29.95 and 27 make up to 2.95, max gain of 2.95 below 27

Losses: between 29.95 and 31 lose up to 1.05, max loss of 1.05 above 31

Rationale: Given our bearish fundamental view on INTC, and the stock’s intraday rally so far today, we want to target the $28/$29 area for the next move lower in the stock as long holders come to terms with the diminished prospects for INTC going forward. The $28/$29 area is important support in the stock, which is why we decided to do a put spread as opposed to an outright put in the name.