The Death of the PC and Intel (INTC)

In the case of specific industries, for instance in the airline industry, it’s absolutely true that a young analyst, looking at things fresh–if he is as hardworking as I was and in really willing to dig in–has a tremendous advantage over me. I will always believe, by the way , that in hiring analysts, the best guys are the ones with two or three years’ experience. Probably from a poor background–hungry, cynical, skeptical, taking nothing for granted. As concerns an industry, it is absolutely true.

However, as concerns the big issues–interest rates, what I call the universal issues–I won’t defer to anybody, because knowledge of history is so important. You have to an historian, not a ‘quant.’ Really, in those issues, there is nothing new under the sun. –Joe Rosenberg (Interview Grant’s Pub. April 6, 1987)

Intel

Yes, the news is out–there is weaker than expected demand in the Personal Computer unit as the global economy and Tablet sales depress Intel’s business, for now.

But with these financials INTC_VL Oct 2012 and the current price and INTC_35 Yr, I will take a look. I pray for a negative earnings report to send the price lower, but you should first value the entire company. What are you getting for your dollar?  The strong balance sheet (excess cash), return on total capital of 18%, 4% dividend yield (the company is paying out about 40% of its profits to its shareholders) and earnings yield of about 10% are what interest me.  I bet the PC industry will not disappear at the rate the market may be projecting, but do I really know that?

Update on Oct. 23rd, 2012: Death of the PC Articles

 

5 responses to “The Death of the PC and Intel (INTC)

  1. I’m long INTC, influenced by earnings yield (I get closer to 15%, but splitting hairs) and a little Greenwald in the back of my mind who says that technology tends to get copied and leapfrogged, so bet on the guy with deep pockets (for the long term).

    2011 INTC R&D $8.4B
    2011 AMD R&D $1.5B
    2011 ARMH R&D $267M

    I think when you say “excess” cash, your context is that they have reserves to weather a storm, but not “excess” in the sense of “subtract out for enterprise value”.

    I don’t see that latter type of “too much” cash on the B/S, but I’ve always struggled with pinning down “true” working capital, despite the Greenblatt case studies. This link helped, but I’m not there yet…

    http://www.expectationsinvesting.com/tutorial4.shtml

  2. Agreed, that they do not have excess cash, but the balance sheet won’t cause them worries. They are also investing heavily in R&D. No guarantee as NOKIA illustrates so clearly. Nokia got leapfrogged and its culture couldn’t adapt.

    But l love the news today: SCARY.

    I diversify in about 20 names or only allocate at most 3% up to 4 to 5% while keeping the balance of portfolio in cash. INTC won’t triple like a microcap but let’s see where we are in three years.

    Wall Street Digests Intel’s (INTC) Q3 Results and is Not Impressed
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    October 17, 2012 10:58 AM EDT
    Get Alerts INTC Hot Sheet
    Price: $21.68 -3%

    Rating Summary:
    21 Buy, 27 Hold, 5 Sell

    Rating Trend: = Flat

    Today’s Overall Ratings:
    Up: 20 | Down: 26 | New: 11
    Share of Intel (NASDAQ: INTC) are down 2.7 percent intra-day Wednesday following third quarter results and lackluster guidance after the close. Analysts across Wall Street have digested the results, asked questions on the conference call and are now commenting on the results.

    Canaccord Genuity – “We reiterate our HOLD rating on shares of Intel as we expect weak demand for PCs to continue to weigh on margins in the form of depressed factory utilization and product mix. Sell-through of emerging Win8 devices is likely to see mixed results as untested form factors come to the market, and we see these looming data points as weighing on sentiment through Q1 ahead of the launch of Haswell.” Maintains Hold, cuts price target from $24 to $20

    Deutsche Bank – INTC reported 3Q12 results above the mid-pt of revised guidance but offered a cautious outlook for 4Q12 as macro headwinds persist. As a result, INTC is taking its inventory/GM medicine by cutting factory utilization to below 50%. While this aggressive action will hit GM hard in 4Q (-6ppts q/q), we believe it is a prudent strategy in an uncertain demand environment and sets the stage for margin recovery in 2013. Despite the more muted outlook and heavy investments in R&D/manufacturing, our ests are largely unchanged. We believe Intel is poised for a return to revenue growth in 2013.” Maintain Buy, $28 price target.

    Jefferies – “INTC beat recently lowered expectations, but forecasted 1% QQ revenue growth in 4Q and for 4Q gross margins to drop to 57.5%. We’re sympathetic to the bull case, which is that INTC will see better orders from an inventory restock and better demand as Windows 8 launches, but we model gross margins to stay below 59% through 1Q, and believe there is time. Reiterate Hold, cuts price target from $29 to $24.

    Goldman Sachs – “We maintain our Sell rating as Intel’s stock is highly correlated with gross margin, and we believe that gross margins in 1H13 will decline into the low-to-mid 50% range. We believe this cycle is playing out like all the others, as limited capex of about $5 bn/year in 2007-2010 lead to tight supply and record margins. As we have long argued, the increase in capex to $10.8 bn in 2011 and $11.3 bn in 2012E would likely lead to a decline in gross margins. Intel’s margins have declined in the six prior cycles that it raised capex more than 25%, with an average decline of more than 700 bp. 4Q margins based on guidance are down about 1000 bp from peak, and we expect an additional decline in 1H13 as wafers made at lower utilization should be sold in 1H, continued under-utilization charges are likely, Intel will have 14 nm start-up costs, and ASPs could be down. While lower utilization should enable lower capex (we estimate capex of $7-$8 bn in 2013E; see our note Capital reuse should allow Intel to cut capex but still get to 14nm) and eventually drive higher margins, Street estimates will likely need to be reset before we can be more positive on the stock. Recall our framework for upgrading deep cyclical stocks is: (1) trough margins; (2) management capitulation; (3) some signs of life on the horizon.” Maintain Sell, lower price target from $21 to $20.

    Oppenheimer – “INTC reported 3Q sales/EPS of $13.5B/$0.58, ahead of negatively pre-announced estimates and consensus $13.2B/$0.50. Fourth-quarter guidance of $13.6B (+1% Q/Q) is below Street’s $13.7B and normal seasonality. In our view, mgmt’s guidance for Q/Q growth in 4Q is less than conservative given well-documented PC woes, macro sluggishness, and recent (and ongoing) slowdown in Enterprise. Investors will also struggle to ignore the material disconnect between third-party PC data and INTC’s bullish projections. DCG (the heretofore jewel in INTC’s crown) softness and 630bp GM drop pile incremental negatives onto an already tough year. INTC shares could see pressure Wednesday (10/17) if investors deem mgmt’s outlook too ambitious. Risks to 4Q outlook and lack of a credible wireless strategy keep us on the sidelines here.” Maintain Perform rating.

    Gabelli – “Sales in the enterprise server segment were softening and weakness in consumer PC remains challenging. PC billings in the month of September improved, driven by system production of the upcoming Windows 8… We believe that Intel still has sustainable growth drivers of enterprise PC refresh, data center/cloud computing, and higher market penetration in growth markets.” Maintain Buy rating.

    Wedbush – “Despite softening in enterprise, Intel (INTC) printed Q3 results above its pre-announced guidance on improved PC-related billings towards the end of Q3. Midpoint of Q4 revenue guide slightly misses expectations with GM guidance impacted by lower demand and utilization charges. We maintain our NEUTRAL rating as we think upside to the stock from these levels may be limited until there is better visibility on the health of the overall macro environment, consumers’ appetite for Ultrabooks, and sell-through of Windows 8. Our $23 PT is based on about 11x our 2013 GAAP EPS estimate of $1.90 (from $1.85) plus $2.03 (from $2.63) cash per share.” Maintain Neutral $23 price target.

    MKM Partners – “We had expected an unpleasant call, and a negative tone around demand and the need to significantly lower factory utilization near-term certainly delivered on that. However, commentary on the ability to aggressively pull forward the 14nm process transition and potentially improve profitability in early 2013 is a clear positive. Realistically, the stock probably won’t work until we get better visibility into 2013 demand, but investors seem to equate weak macro + OEM disarray ahead of Win 8 to mean “the PC is dead” and INTC is going with it – with PCs adding tablet functionality faster than tablets are adding PC compute capability, and INTC likely to leverage its manufacturing and technology advantage to penetrate mobility, that seems structurally too pessimistic to us.” Maintains Buy, $27 price target.

    Wells Fargo – “Intel did better in the September quarter than the midpoint of its downwardly revised guidance given on September 7, but the December quarter sales outlook is far below normal seasonality and gross margin for December is expected to be sharply down. Capital spending for the full year 2012 is far below the original plan too. We think that Intel is reacting appropriately to the business weakness it is seeing by rapidly cutting capex and production, and reducing operating expenses. The midpoint of December quarter guidance represents 1% sequential growth following flattish sequential sales in the September quarter. The midpoint of December quarter gross margin guidance is for a drop of six percentage points sequentially to 57%. Intel is however cutting back production sharply, which is expected to result in an underutilization charge that will impact December quarter gross margin by about 4 percentage points and also reduce inventory by about $500 million.” Maintains Overweight, cuts valuation range from $33-$39 to $28-$33.

    Nomura – “Q3 earnings review, some positives, more negatives. Gross margin is weaker in Q4 at 57%, but underutilization charges going forward will be a tailwind, which should support GMs of 58-60% in 2013. Intel expects to burn channel inventory again in Q4. And a late Windows 8 launch (Oct 26th) could also help. We felt this was the first quarter Intel acknowledged that tablets and phones are eating into PCs, this is a significant headwind to growth. The net cash balance declined from $6.5bn to $3.4bn qoq. We think a lowered cash balance is weighing on Intel’s ability to make share repurchases, which came in at $1bn in Q3, versus $4bn in Q3-11.3Q12 results review. FY12E EPS from $2.07 to $2.1; FY13E EPS at $1.85.” Maintains Reduce, $19 price target.

    Williams Financial – While the company delivered Q3 results that were ahead of its negative pre-announcement in early September, the firm saw seasonal sell-through at about half the typical Q3 pace and expects much the same during the December quarter. With a myriad of factors impacting consumer and enterprise activity, the company is not only being cautious in its outlook, but also taking significant steps to reduce internal inventory by about $500 million in Q4, requiring fab loadings to fall below 50%. The anticipated soft market and the need to take a Haswell inventory reserve will pressure gross margins by about 600 basis points in Q4. Top line caution and gross margin deterioration puts Q4 sales and EPS well below our estimate and the prior Street consensus.” Maintains Hold

    Needham& Company – “We entered INTC’s 3Q12 call quite cautious due to fears that weak demand for PCs would weigh on revenue and pressure gross margin. While INTC’s 3Q12 revenues of $13.5bn and gross margin of 63.3% beat revised guidance, we believe gross margin benefited from a $400MM inventory build in the quarter. 3Q12 EPS also benefited from a lower than expected tax rate. Given the weak PC demand environment and high inventory levels, Intel guided 4Q12 gross margin to 57%, well below our 62% estimates, to reflect significant excess capacity charges stemming from a reduction in fab loadings to less than 50%. With gross margin under pressure and global PC demand weak, we remain cautious on Intel and reiterate our Hold rating.” Maintain Hold rating.

    RBC Capital – “Intel reported a $0.09 EPS beat on better-than-expected sales and gross margins. Trends in PC Client group (RBCe -7% vs. -1% actual) were more positive than we had expected on improving billings in September (Win8 builds) which was offset by slower sales from the Data Center group (RBCe +7% vs. -5% actual) due to weaker than expected sales in the Enterprise 4-way segment. For the DecQ, the company is guiding revenues to $13.6bil at the mid-point, which is close to our/$13.66bil and slightly lower than Street/$13.78bil. Gross margins are expected to be 58% proforma, lower than our/62.3% and Street/61.4%, due to under-utilization charges and Haswell start-up costs.” Maintains Market Perform, $24 price target.

    UBS – “Intel 3Q12 results were ahead of expectations on most all accounts except its server processor business, which has been a key engine of growth. Intel attributed an unfavorable mix as its highend server processors sold into Enterprise were weak while the Cloud server market (+50% y/y) stayed strong. We remain positive on Intel based on our longer-term view and hence maintain our Buy rating, but we are incrementally more cautious and thus lower estimates and PT to $29.00 from $30.50. We believe uncertainties around the macro and market acceptance of Windows 8 devices are likely to keep the stock range-bound near-term.” Maintains Buy, target cut from $30.50 to $29.

    • Dear Lumilog:

      The difference in our estimated return is that you must be factoring in growth while I do not.

      • Not factoring in growth, but I am looking pre-tax so maybe that’s the difference.

        MktCap = $109B
        LT Debt = $7.1B
        TTM OI = 3841 + 3832 + 3810 + 4599 = $16082M

        16082 / 116100 = 13.9% Earnings Yield pre-tax

        13.9%*(1-.28) = 10% Earnings Yield post-tax

        There’s plenty more I could add to EV if I were a stickler but looks like MktCap still dominates.

        It probably only makes sense for me to look pre-tax when I’m comparing businesses.

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          Barron’s Cover
          | SATURDAY, OCTOBER 20, 2012
          Bye-Bye, PCs

          By TIERNAN RAY

          As the PC era wanes, Dell and HP will fade from view. Tablets, smartphones, and big data will drive Apple, Google, and EMC.

          When Microsoft introduces its long-awaited Windows 8 operating system Friday, it will be the first Windows rollout to face real competition since, well, forever. Today, smartphones and tablets do almost all of the day-to-day tasks a PC does — including sending e-mail, surfing the Web, and editing photos — and do some of them better. Already, tech investors, long accustomed to a lift from Windows, are primed for disappointment.

          At the same time, big data — massive data centers that can marshall tremendous computing power — is upending the traditional network, pushing information-processing into the palm of your hand. And it’s happening faster than almost anybody expected, as last week’s spooky earnings surprises at Microsoft (ticker: MSFT) and chip makers Intel (INTC) and Advanced Micro Devices (AMD) made clear.

          So who are the winners and losers in a post-PC world? Apple (AAPL), Google (GOOG), and Samsung Electronics (005930.Korea) certainly stand to gain, and EMC (EMC) will be a winner in the big-data world. Obvious losers include PC makers Hewlett-Packard (HPQ) and Dell (DELL). Intel and Microsoft, which straddle both the PC and post-PC worlds, are tougher calls. Their high dividends and cheap valuations make them hard for investors to rule out.

          On-demand computing, which is to say, the cloud, will benefit Amazon.com (AMZN), and Salesforce.com (CRM). And arms merchants to cloud providers, like storage giant EMC (EMC), also will prosper.

          There are new challengers, as well. Workday (WDAY), Splunk (SPLK), and Qlick Technologies (QLIK), recent IPOs all, bear watching by investors. Promising startups that have not yet hit the public stage, such as equipment vendor Ruckus Wireless, also could be game-changers down the road.

          SEPARATING GOOD INVESTMENT IDEAS from bad, however, isn’t as easy as picking winners in the marketplace. Companies such as Salesforce and web-hosting outfit Rackspace Holding (RAX) may be essential to this sea-change, but their valuations are scarily high. Salesforce, at about $149, fetches 99 times fiscal 2013 earnings estimates, while Rackspace, which operates massive data centers for cloud services, trades at 86 times. Are their opportunities really that much greater than those at Apple, which fetches 11 times estimates, or at Microsoft, which trades at 10 times?

          Enlarge Image

          Ann Cutting for Barron’s.
          Probably not, argues Barron’s Roundtable member Fred Hickey, publisher of the High-Tech Strategist. “Companies like Rackspace and Salesforce are classic story stocks,” he says, “and it is very dangerous to own such stocks when everything they might produce in the way of earnings and cash flow is already priced in.” Also in that boat, he argues, is Amazon.com, which stands to prosper if its Kindle Fire can elbow its way into the tablet computer market. But at 104 times earnings, that’s a big if.

          The table “Who Wins, Who Loses” sifts through both opportunities and valuation, to find the best bets for investors. Google’s earnings flub last week notwithstanding, that company is still on our list of likely winners, which are few and far between.

          IT’S A WHOLE NEW WORLD FOR Microsoft. Smartphones were still relatively primitive when Windows 7 was introduced in 2009, and tablet computers didn’t even exist. Now, as the charts “Game On!” illustrate, they threaten the PC hegemony. Neither Microsoft, HP, nor Dell is a force in smartphones or tablets.

          “It is becoming a mainstream idea that your PC is not the center of everything,” says Kevin Landis of Firsthand Funds, who has owned Microsoft, off and on, for years — and is nervous every time he does.

          That said, Microsoft is putting its vast resources behind its Windows 8 operating system for phones and tablets. And at 12 a.m. Friday, it will begin selling a tablet computer of its own, known as the Surface, setting up a midnight madness event. So we’ll know soon how the excitement stacks up against iPhone and iPad madness.

          On Thursday, Microsoft reported flat year-over-year revenue, led by a 9% drop in the division that contains Windows. The numbers included pre-sales for Windows 8. Excluding them, sales in the Windows unit dropped by a third. At nine times next year’s expected profits, Microsoft shares are very inexpensive, considering the strengths of the company’s other businesses, including server software, databases, and collaboration. But unless Microsoft can show that Surface and all the other Win 8 devices will turn the tide for that part of the division, its stock will continue to suffer. Microsoft closed the week at $28.64 and yields 3.2%. (For more on last week’s earnings mishaps at Microsoft, Google, and AMD, see Tech Trader.)

          THE INEXORABLE SHIFT AWAY from PCs is causing havoc for manufacturers. This year, worldwide sales of personal computers are projected to drop about 2%, to 357 million units, according to IDC’s David Daoud. In dollars, they will fall 5% to 6%. More telling: Smartphone sales are expected to surge 42% this year, to $294 billion, topping PC sales for the first time. And sales of tablets are expected to rocket 65%, to $59 billion.

          To Dan Niles of Alpha One Capital Partners, this sounds very familiar. He worked in the 1980s at minicomputer titan Digital Equipment Corp., whose founder, Ken Olsen, famously said there was no reason anyone would want a computer in his home. DEC was later acquired by Compaq Computer and vanished without a trace.

          Smartphones and tablets are similarly underestimated now, Niles asserts. For that reason, he’s inclined to avoid Intel and Microsoft. “Go ahead, gamble they can make the leap to this new world,” he says. “I don’t want that bet.”

          Enlarge Image

          .
          As the PC market fades, Intel is trying to maintain its lead in server chips, while becoming a force in phones and tablets. Last week, it reported that PC growth had slowed last quarter and this quarter to half its usual seasonal rate, disappointing investors waiting for spiffy new “ultrabook” laptops to make a splash. At the same time, CEO Paul Otellini said Intel’s new Atom chip would be in 20 tablets this quarter, including the Surface.

          The problem is that Intel has more to lose from the PC decline than to gain from selling cheaper chips for tablets and smartphones. The company’s shares, which closed the week at $21.27, trade at nine times next year’s estimates and pay a rich 4% dividend. While Intel may never be a growth company again, it probably won’t hurt investors who own it.

          Apple, trading at 9.1 times this year’s projected profits, after backing out $117 billion in cash and investments, is priced quite reasonably, given its expected 24% growth in revenue this year. Even as one of the world’s dominant phone makers, it has just 7% of the mobile-phone market, according to Gartner, giving it ample room to grow.

          Samsung, the dominant global phone producer, shows no sign of stopping its gains at the expense of smaller companies. Its stock is also undemanding, at 7.5 times next year’s earnings’ estimate. The Korean-listed shares traded Friday at 1.302 million won, about $1,200; its unsponsored American depositary receipts are thinly traded.

          THE OTHER SIDE OF THE POST-PC world is the cloud. On route 101 in Silicon Valley, Wal-Mart has posted signs reading “WALMART DATA,” offering jobs to engineers in its San Bruno labs. That’s a sign of just how mainstream it’s become for companies to sift through enormous amounts of information.

          Wal-Mart’s quest, and others like it, are changing the very nature of data, says Paul Saffo, a tech pundit who runs Discern Analytics, a big-data outfit in Silicon Valley.

          Big data ultimately will redefine the database. To track customer information and behavior in real time, and to respond to it instantaneously, companies are turning increasingly to databases that put information in the random-access memory chips of a computer, rather than on the disk drive, as has been done traditionally. Database-giant Oracle (ORCL) is fending off new competition from SAP (SAP), which sells just such an “in-memory” database. And start-ups also are targeting the database market. Among them: MemSQL, a Silicon Valley company started by former Facebook engineers.

          For the moment, Oracle’s traditional databases are benefiting from the surge, but that could change by this time next year.

          Google is a player par excellence in big data. Sales of smartphones using the Android OS don’t make the company any money upfront—it doesn’t charge for use of the system — but ultimately, all the activity on those phones is sending back to Google real-time data from the world that makes its searches more valuable to advertisers.

          Enlarge Image

          .
          Google CEO Larry Page said on last week’s call that the company was on pace to generate $8 billion a year from mobile devices. And some day, Google’s self-driving car will bring the company real-time readings of traffic conditions — another way to feed Google’s rapacious appetite for big data.

          And what of Facebook (FB), which, like Google, is building its own computers from scratch to redesign the data center? Facebook defenders take a typical Silicon Valley attitude, trusting it will try a number of ways to monetize the increasing use of mobile technology and eventually hit on a solution. Firsthand’s Landis, who’s owned the stock since before its IPO and confesses that he’s sitting on a loss, says, “Even if they hit one out of 10 products right, that’s enough.”

          Maybe so. But all of that experimentation could cause the company to step up spending next year, says Loomis Sayles tech analyst Tony Ursillo, who also co-manages the Saratoga Advantage Trust Technology and Communications Portfolio. And that could shock the Street, which is projecting roughly flat operating margins for the company.

          Amazon.com is one of the most striking players in the post-PC world. Its Kindle Fire, starting at $159, is a truncated tablet — little more than a means for users to feed at the Amazon trough. Two weeks ago, CEO Jeff Bezos told the BBC that the company breaks even on the hardware, preferring to “make money when people use our devices, not when people buy our devices.”

          Amazon has overcome many doubters over the years, but with a triple-digit P/E ratio, there’s still a lot of doubt to overcome.

          Salesforce.com is another cloud company with a heart-stopping valuation, trading at 40 times trailing cash flow. Salesforce has new competition, in the form of Workday, which went public Oct. 12 and popped nearly 70% out of the gate. While Salesforce’s software for managing customer relations is important, Workday’s focus on human resources—benefits and payroll administration — is perceived as far more critical to companies.

          Hickey predicts that Workday could lure away some Salesforce investors, calling it “the real deal” in cloud computing. But Workday is projected to lose money through fiscal 2015.

          EMC is a less expensive way to play the cloud, says Ben Reitzes of Barclays Capital. “EMC’s focus is on the hybrid cloud,” he says. It has products that help enterprises shift parts of their data-processing into the cloud, reaping greater efficiencies, while maintaining full control of their critical data.

          Another company to watch is Ruckus Wireless, which makes equipment that helps carriers offload cellular traffic onto public Wi-Fi hotspots. That is important because the faster connections of the latest smartphones and tablets will cause a surge in bandwidth usage, taxing the precious spectrum. Craig Mathias with Farpoint Group calls CEO Selina Lo “one of the smartest people I know” and a skilled entrepreneur. Ruckus recently filed documents for an initial stock offering.

          AS THIS FATEFUL YEAR for the personal computer grinds on, some investors probably will bottom-fish for stocks. One that might be worth a look is Seagate Technology (STX), which trades at four times next year’s earnings, less than one times sales, and pays a 4.6% dividend. Seagate has a chance to shift from the PC world to the post-PC world, by selling devices for the cloud and tablets. Unlike HP, which has a similarly cheap valuation, Seagate has a strategy for this and the means to implement it.

          A factor that’s important for all technology stocks is what happens after November’s elections. Any progress on tax policy could unleash massive amounts of cash held by tech companies overseas. That, says Paul Wick, portfolio manager of Columbia Seligman Communications & Information fund, could lead to increased share buybacks and higher dividends. It could also encourage mergers and acquisitions, putting some beaten-down names in play.

          But unless that happens, expect PC names to struggle as they adjust to a world in which smartphones and tablets are increasingly seen by consumers as capable of providing most, if not all, of the computing power they need.

          In short, the traditional economic engine of the personal computer has broken down, and it’s unlikely to get back in gear.

          .

          E-mail: editors@barrons.com

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