MorningWord 4/20/16: $INTC Briefing

by Dan April 20, 2016 9:29 am • Commentary

Intel (INTC) reported Q1 results and forward guidance last night after the close. While the Q1 results hit the previously lowered estimates, Q2 sales were guided to $13 to $14 billion, below the consensus of $14.2 billion.  This should not come as a huge surprise given their exposure to PCs, that the company confirms a high single digit decline in sales in 2016, fairly consistent with Gartner’s Q1 estimate of a 9.6% decline.  The big news is that the company is doing a management restructuring and announced their intent to eliminate 12,000 jobs, or 11% of their workforce globally by mid 2017.

For the most part the INTC story is uninteresting. Yeah they are near the top of the PC/Server and Smartphone supply chain with 60% gross margins, but the next decade’s mix of sales will have to a look a lot different than the prior decades.

In late December INTC closed their nearly $17 billion acquisition of Altera, a company that had $1.7 billion in sales last year that are largely in chips focused on higher growth areas like data center and internet of things (IoT).  In Q1 INTC’s Client Computing Group, which is essentially PC chips was $7.5 billion of their $13.73 billion total which grew 2% yoy, while data center was $4 billion, growing 9% yoy and IoT was only $651 million, but growing 22%. While this was an expensive acquisition on many levels, the Q1 results, which include ALTR demonstrate their intent to reduce their reliance on PCs. But the deal dramatically reduces the company’s net cash balance, which will likely force them to raise more debt to increase buybacks and dividends.  In Q1 INTC bought back $800 billion in stock, paid $1.2 billion in dividends, and in 2015 bought back $3 billion in stock and paid more than $4 billion in dividends.

INTC is a cheap stock, with a management that is taking aggressive actions to tackle some of the largest secular shifts in computing in decades and move beyond the PC. But the jury is still out whether oprogress in mobile, data centers and new tech let IoT is moving faster than their erosion of 10% annual declines in PCs.

I’ll just leave you with this, INTC has been a dramatic beneficiary of global ZIRP, borrowing cheap, buying back tons of stocks, managing earnings that (even ex ALTR) are below their 2011 peak with sales just a tad higher.  In past cyclical downturns INTC execs would espouse the virtue of spending their way out of a recession to take share, but in 2015 the company slashed capital expenditures to about $7.5 billion, down from a little over $10.1 billion in 2014.  The company appears to have shifted gears a bit, focused more on cost cutting.

Investors are taking the results in stride, viewing the stock as somewhat defensive, strong balance sheet, 3.3% dividend yield, nearly double that of the 10 year U.S. Treasury, trades 13x expected 2016 eps that are expected to grow 4%, cutting costs fairly dramatically  etc etc etc.

Despite being down about 10% on the year, it is very near the mid point of one year range, with the prior highs just below $36 as obvious technical resistance, and $28 a level the stock has reversed from on three occasions in the last year as healthy technical support:

From Bloomberg
From Bloomberg

If I were long stock I might consider selling strangles (out of the money call and out of the money put of the same expiration) against long stock, attempting to add to the already fat 3.3% dividend yield.  Barring incrementally worse PC data, the stock will be bought in the high $20s and likely sold in the mid $30s.