Intel surprises on earnings but I think it’s already in the stock price

It was as much of a surprise as Apple’s (AAPL) earnings miss. On October 18, after the New York market closed, Intel announced third quarter earnings of 69 cents a share, 6 cents a share above the Wall Street consensus.

And the biggest contributor to Intel’s surprise was its PC chip group, which contributed $4 billion in pre-tax profit. The company’s unit focused on servers and cloud computing added $1.2 billion in pre-tax profits. And Intel’s chip group that produces low-power chips for tablets, embedded processors, and smart phones turned in a $140 million loss.

Revenue climbed 28% from the third quarter of 2010 to $14.2 billion. Analysts had been looking for revenue of $14.23 billion.

The strong performance in the data center and cloud-computing segment was expected. Growth rates in both markets are strong and Intel has aggressively pushed new generations of server-chips in the market. Its new server chip, the Xeon E5, is due to go on sale in early 2012.

But Wall Street analysts had projected much less revenue and much lower earnings growth for the PC chip unit as PC growth slowed under the dual pressure of a slowing economy that has kept consumer sales down and on a shift from PCs and laptops to tablets and smart phones.

That shift wasn’t in evidence this quarter. Read more

I keep hearing that technology shares are cheap.

The numbers seem to back that up. “Seem.”

Computer stocks trade for just 9.3 times reported earnings before interest, taxes, depreciation and amortization (EBITDA), according to Bloomberg. That’s just 1.3 times the multiple for the Standard & Poor’s 500 stock index for a whole. And that’s the smallest premium for computer stocks since Bloomberg’s data begins in 1998.

The price to earnings ratio for the companies in the information technology sector as compiled by Standard & Poor’s is just 14.8. The multiple for the entire index is 14.7. The 14.8 multiple for the information technology sector is the lowest multiple since December 2009.

And if you want to talk individual stocks, the numbers seem to make the argument even stronger. Cisco Systems (CSCO), one of the technology names to conjure with for decades, trades at a price-to-earnings ratio of just 11.5. Intel’s price-to-earnings ratio is just 10.2.

But, I’m sorry, I just don’t buy it.

I think technology stocks as a whole are pretty accurately priced. The big companies that dominate the sector, the names we all recognize, may even be slightly overpriced. And the true growth companies in the sector may be attractive buys on their growth but they sure aren’t cheap on their price-to-earnings ratios.

I think the whole “Technology stocks are cheap” argument fails to understand exactly how much the technology sector has changed from the good old days and how sweeping the revolution is that is now turning the sector upside down.

Let’s take a look at the assumptions in the technology is cheap argument. Read more

Sell Intel (INTC)

Lot’s of rumors and news floating through the market on Intel (INTC). I don’t think most of it has any real import for investors. It’s certainly irrelevant to anyone who bought shares of Intel for their high dividend way back last fall when I added it to my Dividend Income portfolio.

Then the shares traded at $18.87 and yielded a high (especially for a technology stock) 3.4%. Today, May 6, the stock trades at $23.52 and yields just 2.89%.

That’s a hefty 24.6% gain since September 17. But because of that gain the yield is no longer high enough to make the cut for my Dividend Income portfolio and I’m dropping it from that list with today’s revision of that portfolio (http://jubakam.com/2011/05/when-markets-get-bumpy-thoughts-turn-to-dividends-of-course-you-should-be-thinking-about-dividends-all-the-time-my-dividend-income-portfolio-is-a-good-place-to-start/ )

The recent buzz is a result of Intel’s announcement of a new 3D chip technology. Read more

The chip war that’s bad for Intel is good for the shares of chip equipment makers

The same logic that has pushed shares of chipmaker Intel (INTC) down despite record earnings and revenue is pushing up the shares of semiconductor equipment makers

Look what happened on January 14, the day after Intel announced its earnings.

For the day Intel fell by 1%. But shares of chip equipment makers Applied Materials (AMAT) were up 7.5%%, Novellus Systems (NVLS) up 12.3%, KLA Tencor (KLAC) up 3.4%, and ASML Holding (ASML) up 9.5%.

How come?

Investors figure, rightly in my opinion, that Intel is in the early stages of a very expensive war to gain traction in the market for the chips that run smart phones and tablet computers. (More on Intel’s current position and strategy in my January 11 sell (http://jubakpicks.com/2011/01/12/sell-intel-intc/ ) We all know how this works from watching Intel demolish the competition in the market for PC chips. Intel will build factory after factory with each generation producing chips that are simultaneously smaller and more powerful as the company uses new technology and new equipment to pack circuits ever closer together.

That was tremendously expensive when the competition was just a relatively small company such as Advanced Micro Devices (AMD). Intel’s pockets were so much deeper that it eventually forced AMD out of the chip manufacturing business completely. (Advanced Micro Devices spun off its chip manufacturing into a stand-alone business.)

This time around the war will be much more expensive because the competition includes equally deep-pocketed companies such as Samsung.

This time we’re talking multiple generations of chips built in multiple generations of new factories using lots and lots of the most expensive new chip making machinery.

The worry is that Intel’s margins will suffer while the war goes on. But you can see why it’s logical to think that the big near-term winner of Intel’s war is going to be the companies that make the chip equipment.

Right now the sector looks over-extended but the war isn’t going to be over in a day or a month. If you’re already in, I’d hold on though any pullback and add to positions. If you’ve been caught on the sidelines, use any dip to get in. My two favorites in the sector are Applied Materials and ASML Holding.

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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Applied Materials, ASML Holding, and Intel as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.  I’ll have the fund’s portfolio as of the end of December posted in a few days.

Intel (INTC) will probably report a very good fourth quarter of 2010 on Thursday, January 13, after the market closes. The Wall Street consensus is looking for 50 cents a share. That would be up 22% from the fourth quarter of 2009.

I think Intel is likely to make that number. That would very good result for a stock that’s trading at just 11.1 times trailing 12-month earnings.

And I don’t think it’s going to matter much at all. Investors have pretty much decided that Intel is a has-been chip stock.

Think about why this stock trades for just $21 and change. Read more