INTC Offside

by Dan January 13, 2016 1:55 pm • Commentary• Trade Ideas

Event: Intel (INTC) reports their Q4 results tomorrow after the close. The options market is implying about a 4.5% one day move which is rich to the 4 qtr average one day post earnings move of about 2% and the 10 year average of about 3.5%.  

What’s interesting about tomorrow’s report is that it is the first opportunity that the company will give forward guidance that includes their $17 billion acquisition of Altera (a deal that closed late last month).  While the intent of the deal was to diversify away from what is a nearly 50% revenue concentration from PCs, the company will need to show continued strength in data-center and cloud servers, and map out potential upside from enterprise tablets, mobile, internet of things (IoT) and other industrial and telecom sectors that Altera served.

While management will go out of their way to highlight future diversification from PC chips, in Q3 their were few segments that one would say are experiencing hyper growth (Q3 press release):

• Client Computing Group revenue of $8.5 billion, up 13 percent sequentially and down 7 percent year-over-year
• Data Center Group revenue of $4.1 billion, up 8 percent sequentially and up 12 percent year-overyear
• Internet of Things Group revenue of $581 million, up 4 percent sequentially and up 10 percent year-over-year
• Software and services operating segments revenue of $556 million, up 4 percent sequentially and flat year-over-year

You know the drill on balance sheet & cash return, it’s strong, and they are committed to it between their existing $20 billion buyback authorization and the dividend that currently yields nearly 3%.  But as Ashraf Eassa from The Motley Fool described last month, buyback activity might have peaked in 2015:

If the combined Intel and Altera entity generates around $13 billion in free cash flow next year (a bit higher than the ~$12 billion it expects to rake in this year) then, once we subtract out dividend payments of around $5 billion, the remaining $8 billion will need to be used to pay down debt for the company to hit its net cash target.

This leaves very little room for the company to repurchase stock in the coming year. In fact, if Intel plans to be at zero net cash by the end of 2016, I’d expect the company to report that it did very little in the way of share repurchase in the final quarter of 2015.

INTC is a fairly cheap mega-cap tech stock, trading 14x expected 2016 earnings that consensus has growing at 5% on a 6% sales increase.  I would add that only 20% of their sales come from North America, and about 60% come from Asia, the company’s guidance could include caution regarding impact of dollar strength on margins and the potential for uncertainty in emerging markets to pick up in the first half of 2016.

From purely a technical standpoint, the chart looks recently like a slow moving trainwreck with a break below long term support at $34, which also corresponds with the steep uptrend from the August lows that resulted in more than 40% gains from the lows to late December highs:

[caption id="attachment_60219" align="aligncenter" width="600"]INTC 2 yr chart from Bloomberg INTC 2 yr chart from Bloomberg[/caption]

My Trade: I want to play for an inline to slightly disappointing Q4, with muted forward guidance which in this market will be a FAIL.  Near the money short dated puts look dollar cheap to me.

*Trade: INTC ($32.30) Buy to open Jan15th 32 puts for .65 cents

Break-Evens on INTC stock on Jan15th (Friday’s Close):  

Profits: gains like short stock below $31.35

Losses: losses of up to .65 between $31.35 and $32 with total loss of .65 above $32

Rationale: This is a binary trade. It’s likely it’s either worthless or at least a double following earnings. If I did see weakness into the event it’s possible that this could be spread to take some premium risk off, but that’s unlikely. Most of the lower put strikes are too dollar cheap and too tight to the downside to bother (e.g. the Jan 30s are only .13) This is a trade I’m willing to lose what I am risking.

Bloomberg Preview:


  • 4Q GAAP EPS est. 63c (range 60c-68c)
  • 4Q rev. est. $14.8b (range $14.6b-$15b), co. forecast $14.3b-$15.3b (Oct. 13)
  • 4Q gross margin est. 62% (range 62.0%-62.5%), co. forecast 62% +/- a couple of points (Oct. 13)
  • 1Q GAAP EPS est. 50c
  • 1Q rev. est. $14.10b
  • 1Q gross margin est. 60.9%
  • 2016 rev. est. $58.5b
  • 2016 gross margin est. 62.4%, co. forecast 62% +/- a couple points
  • 2016 capex est. $9.7b, co. forecast $10b, +/- $500m
    • NOTE: Nov. 19, Intel Sees 2016 Rev. Growth in Mid-Single Digits vs Est. Up 4%