by Jeff Reeves | January 18, 2013 6:22 am
Intel (NASDAQ:INTC) reported earnings after the bell Thursday, posting year-over-year declines in profit and revenue. Intel’s forecast also slightly missed the mark on revenue … and after-hours action looked to erase the run-up we had seen in the days before this earnings report.
So am I worried as an Intel shareholder? Hardly. This is pretty much what most people expected.
Here are the specifics: Intel showed net income of $2.5 billion, or 48 cents a share, which was down 27% year-over-year. Sales slipped 3% to $13.5 billion. Despite the slide, earnings beat expectations and revenues matched.
As I said in my earnings preview, it’s going to be more than just the earnings and the targets that matter. Investors need to dig deeper into the details and corporate strategy to make some forward-looking assumptions — especially for stocks like Intel that have been facing very specific headwinds for some time.
After all, the question is not whether PC sales are declining — they are, and anyone who doesn’t know this has been asleep since 2009. The evidence is at companies like Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL) as well as industry reports on laptop and desktop trends; Gartner calculated a 3.5% decline in PC shipments for 2012 vs. 2011 in one of the most recent rundowns.
So sorry, WSJ, your headline “Intel Hurt by PC Shift” is not helpful or new to me.
Here’s what I actually found noteworthy in the Intel earnings yesterday:
I admit I was mildly disappointed by the outlook and margins. And while some are disappointed by the capital plans, it’s impossible to know for sure how things will shake out A big investment now might be very wise.
The negative to the capex scheme is that Intel could be burning the money on expanding its foundry business but ultimately creating excess capacity. After all, didn’t it just hurt its margins by aggressively bleeding down inventory? Furthermore, investments in research might never pay off. Currently, Intel budgets at least $7 billion for R&D on new chips, making it one of the top research spenders in the world. But if it can’t figure out mobile after that expense, it’s wasted money.
I remain confident that Intel’s ability to produce energy-efficient chips for PCs will ultimately serve it well in the mobile market — so I’m willing to watch more of the movie as INTC plays catch-up in this space.
Furthermore, I am not that afraid of overcapacity. Remember that Intel is the 900-pound gorilla of chipmaking. It maintains the largest semiconductor manufacturer on the planet, with market share bigger than No. 2 Samsung and No. 3 Texas Instruments (NASDAQ:TXN) combined. And IDC says computer makers might actually stabilize and see modest growth in 2013.
So the pie is at worst the same size, maybe a little bigger, and INTC continues to carve out the biggest slice.
And don’t forget the dividend. It’s the foundry business and dominant market share that allows for Intel’s nearly 4% yield. Yes, investors love ARM Holdings (NASDAQ:ARMH), bigging it up 500% in five years thanks to its contracts on various Apple (NASDAQ:AAPL) products and its overall mobile dominance. But the company only pays a nominal dividend of less than 0.5% and lives and dies by its design. Intel might not be as sexy, but it’s more stable, and long-term income investors may actually find this preferable.
There are admittedly big risks here. If Intel can’t figure out mobile, it’s in trouble. And if PC sales continue to slide — or worse, if a competitor begins to chip away at Intel’s long-held dominance of the broader semiconductor market — then things could get ugly in 2013.
And longer-term, some like Theresa Poletti of MarketWatch warn that Intel is increasingly fabricating other companies’ chips — a lower-margin business. That indeed remains a big concern, and the company takes great pains to stress that home-grown chips are the top priority and they won’t be courting competitors’ designs with low-cost manufacturing deals anytime soon.
But I bought in at $21 because I thought the company was a decent value with a big, sustainable dividend. Nothing I have seen in this earnings report shakes that assumption. I’m disappointed the strong start to the year might not stick, obviously. But I remain convinced that Intel will see a strong 2013.
And even if it only drifts slightly higher? That dividend of nearly 4% is a great incentive to hold long-term … presuming there’s no disastrous news about overcapacity or continued failures in the mobile space, of course.
I am hardly unbiased here and might be a victim of seeing what I want to see as a shareholder. Here are my original reasons for buying Intel back in October at $21.50. Then I doubled down at $20.50 in December to give me a cost basis of $21.
What do you think — is INTC a buy at $21?
We could be there in a day or so, so the question is worth asking.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple and Intel.
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