MorningWord 1/10/17: Inside Intel (INTC)

by Dan January 10, 2017 9:36 am • FREE ACCESS

Semiconductor stocks were one of the best performing sub-sectors in the S&P 500 (SPX) in 2017. The semiconductor etf SMH was up 37%. Compare that to the Nasdaq Composite, up only 7.5% and the SPX up 9.5%. The best performing stock in the SPX was chipmaker Nvidia (NVDA), which closed up 225%!  Much of the performance was fueled by M&A activity, topping $200 billion in deals in the past two years, with the icing on the cake being this past October’s $47 billion bid from Qualcomm (QCOM) for NXP Semiconductors (NXPI), the largest semi deal on record, and the fifth largest deal globally. You know why all the deal activity, PC and Smartphone component suppliers desperate need to diversify into emerging technologies like autonomous driving, Internet of Things, AI/Machine Learning etc.

It’s worth noting that Intel (INTC), the largest company in the space by market cap at $173 billion and by annual revenues at $58.8 billion, didn’t add much to the 2016 performance of the sub-sector as it only closed up 5% on the year:

INTC 1yr chart from Bloomberg

But many technicians might see a chart where INTC is building steam for a breakout above the late 2014 / Oct 2016 double top:

INTC 5yr chart from Bloomberg

And if that near term technical breakout were to occur, it’s important. Here’s why. Take a looksy at the chart of INTC since 1999. A breakout here would be epic, with no overhead resistance till $50:

INTC since 1999 from Bloomberg

But before you get too geeked up about a 25% rally, remember that the company gave guidance in late Oct (for the quarter that just ended) that was a tad below consensus estimates, on worse than seasonal sales of server chips in its Data Center Group (think cloud). The shares to decline 6% the next day. The stock has yet to fill in that gap, showing investor unease with the potential for the company to beat that weak guidance:

INTC 4 month chart from Bloomberg

INTC will report Q4 results on Jan 26th after the close. This will be a widely watched report of the entire sector as large scale m&a is likely to abate in 2017 and the realization of synergies of the last two years deals could be a theme. INTC trades 13x expected 2017 eps growth of 5%, on 4% expected sales growth.  Maybe the stock’s 2.85% dividend yield is starting to lose its luster with the recent rise in rates (10 year Treasury yield at 2.38%) and the balance sheet a bit more levered over the last two years with their debt load more than doubling from $13.6 billion in 2014. A cautiously optimistic outlook from INTC management likely has the stock testing those prior highs. A series of beat and raises would see the stock in the mid $40s. On a breakout, multiple expansion will be a theme for stocks like INTC. It’s part of a select group of mega-cap tech stocks that have traded for years below a market multiple (see MSFT).  Mike and Mark talked about the stock last week and detailed a stock alternative.

We will check back on the stock prior to results with more ideas.