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posted on January 18, 2013 at 2:34 pm
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When I added Intel (INTC) to my dividend income portfolio on January 11 http://jubakpicks.com/2013/01/11/reformatting-my-dividend-income-portfolio-for-a-period-when-dividend-investing-gets-more-important-and-tougher-too/ , I wrote that the stock had tumbled in the last twelve months on fears of the continued slowdown in the PC market. And I said that I saw signs that Intel’s foundry business, the business of making chips for other chipmakers, was starting to pick up speed. The growth of that business could transform the way investors thought of Intel again, I added.

Well, both those trends, the bad and the good, have been in evidence in the last few days.

On January 17, after the close of the New York markets, Intel reported fourth quarter earnings of 48 cents a share, 3 cents a share above the Wall Street consensus, on revenue of $13.48 billion (versus the $13.53 billion consensus.) Gross margins in the quarter came in at 58% against the company’s guidance of 57% (plus or minus two percentage points.)

As expected, it was the PC group (63% of revenue) that killed the quarter. Revenue from that unit at Intel fell 1.5% from the third quarter and dropped 6% year over year.  Those numbers are worse than they seem since Intel’s PC business traditionally reports 5% to 7% revenue growth in the fourth quarter.

Guidance for 2013 wasn’t any worse than Wall Street had expected, but no better either. The company told analysts to look for revenue to grow in the low single digits. That works out to a range of $53.9 billion to $59.4 billion in revenue for the year. (Wall Street projections are at $54.4 billion.) Gross margins will come in at 60% (plus or minus two percentage points.) That would be a drop of about 2 percentage points from 2012. The drop is mostly a result of start up costs on new 14 nanometer production lines.

The big surprise—and one that left analysts scratching their heads—was a big projected increase in capital spending for 2013. Intel will spend $13 billion next year, well above the official Wall Street estimate of $10 billion to $11 billion and even further above the unofficial “whisper” estimate of $8 billion to $10 billion. Much of the spending seems to be dedicated to equipment for 14-nanometer and 10-nanometer production that would add to capacity in 2014-2015.

Why, analysts wound up asking, would a company that is experiencing falling revenue on lower PC chip sales plan to spend so aggressively on equipment?

The answer lies, I think, in a January 17 story from Bloomberg that Intel had signed Cisco as a customer for its foundry operations. (Neither Intel or Cisco would confirm the deal to Bloomberg.) Intel already sells its own chips to Cscos, but the new deal would, for the first time, have Intel manufacture chips designed by Cisco. This deal would be Intel’s first foundry agreement from a major chip user. The only companies that Intel has announced to data are three mall designers of programmable logic and networking chips: Tabula, Achronix Semiconductor, and Netronome Systems.

Intel’s shares are down 6.8% as of 2 p.m. New York time. That has moved the yield—the reason the stock is in the dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ after all—to 4.1% on trailing 12-month dividends. On the recent quarterly dividend rate of 22.5 cents a share, the dividend yield is 4.3%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Intel as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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  • chapmame on 18 January 2013

    Is it possible the capex could be for manufacturing aaple chips?

  • pyao88 on 19 January 2013

    “Intel already sells its own chips to Intel”
    Replace last “Intel” with Cisco.

    “three mall designers of programmable logic and networking chips”

    you mean small?

  • eremmell on 19 January 2013

    Jim -
    I’ve been watching INTC, but I don’t have a long position yet. What do you think the best entry point will be, i.e. do you expect it to keep dropping and for approximately how long? Thanks.

  • Ima Fan on 19 January 2013

    Many years ago, Intel cut capex when the “chips were down” [so to speak] and lost market share on the rebound. They have not repeated that mistake. They are following their strategy of investing for the long term. I take it as a good sign.

  • rolfer1 on 20 January 2013

    eremmell – major support at the high-to-mid $19′s, then mid-$18′s — if you doubt a near-term correction, you might consider buying now (I have).

  • Yclept on 20 January 2013

    I agree that Intel should stick to their guns and keep pushing chip processing power and efficiency. If they have to take some foundry work to keep the doors open and the lights burning, that’s okay. Within a short time autonomous care givers, vehicles, soldiers, and every other work oriented robot will need all the processing power and energy efficiency it can obtain and Intel is setting themselves up to be almost a sole-source of those chips. They’ve always been near the leading edge of chip technology — it’s altogether sensible to move out to the bleeding edge.

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