Shares of Intel (INTC) have soared today after the company raised its guidance yesterday for second quarter sales. The stock is up 6.7% to $29.83 a share as of 3:30 P.M. New York time today. Intel is a member of my Dividend Income portfolio http://jubakam.com/portfolios/jubak-dividend-income/
Sure the capital gain is great—Intel’s share price is up 58.5% since I added it to this portfolio in September 2010.
But the surge in price has knocked the dividend yield to 3.1% from 3.3% in April. And this supposed to be a dividend income play.
Sell on the gain or hold?
Intel has done a good job in recent years of increasing its dividend payout as the share price climbed. We’re roughly on schedule for another dividend announcement in the next week or two. I’d certainly hold on through that and see what the company has to say. Whatever the company says about dividends, though, I think this stock’s price has further to climb. I’m raising my target price to $34 a share by December from the current target of $32 by November 2014.
Yesterday Intel said that it now expects second quarter sales of $13.7 billion. That’s a jump from the $13 billion in sales the company forecast back in April. Annual sales, Intel projects, will grow for the first time since 2011. Gross margin will climb to 64%, or 1 percentage point higher than it had last projected for the quarter, on higher PC unit volume.
The big reason is an improvement in sales of traditional PCs. Sales dropped 10% in 2013 and while market researchers IDC and Gartner are still projecting a drop in PC shipments for 2014, they’re now forecasting a smaller decline. IDC, for example, is now projecting a 6% drop in worldwide shipments. (The bad news is that IDC sees growth in PC shipments staying negative until 2018)
From what market researchers can see, it looks like corporate users have finally decided to replace their older PCs at a higher rate. A significant contributor to that trend is Microsoft’s decision to no longer support its long-in-the-tooth Windows XP operating system. That replacement cycle doesn’t fix the long-term problem of user moving from desktop machines to tablets and mobile devices and Intel still has to improve its penetration of those markets. But this kind of short-term news still helps.
Intel isn’t the only stock moving on the improved PC sales forecast. Microsoft (MSFT) was up 1.6% as of 3:30 P.M. New York time and shares of Hewlett-Packard (HPQ) were up 4.9%.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.
On April 15 Intel reported first quarter 2014 earnings of 38 cents a share that beat Wall Street estimates by a penny.
But the big surprise—and the big story for technology investors even if they don’t own Intel shares—was the company’s gross profit margin for the quarter. Wall Street had expected 59% and Intel delivered 59.7%.
How’s that for a company that is cutting prices to break into new markets outside its core strengths in PCs and servers?
The price cutting is pretty aggressive. Digitimes reports that Intel has dropped its quad-core tablet processors to less than $5 in China. That brings Intel’s prices just about even with those charged by China-based chipset providers such as Rockchip Electronics and Allwinner Technology, and below the prices for chipsets from Nvidia (NVDA), Qualcomm (QCOM), and MediaTek.
China’s tablet market is projected as the fastest growing in the world in 2014 (global tablet shipments climbed 29.8% in 2013) and the level of technology in so-called white box tablets manufactured in China continues to climb. The price difference between older single core chips and the newer quad –core chips has dropped to about $1 and more and more white-box tablet makers are adding phone functionality to their tablets. Digitimes projects that 50% of white-box tablets will come with phone functions in 2014.
Intel sold 5 million tablet chips in the first quarter—quite a lot of chips for a company that wasn’t even a player in this market not so long ago. The company’s goal for 2014 is 40 million tablet chips. To get to that number Intel needs to grab market share from Chinese chip makers and from Qualcomm and MediaTek. Hence moves like the aggressive price cuts and the new $100 million Intel Capital China Smart Device Innovation Fund
To do that—break into and then grow market share in a new market—and not kill your company’s margins is extremely hard to do. And Intel is doing it in tablets, mobile, and what it calls the Internet of Things. These new efforts are still dwarfed by the PC Client Group ($7.9 billion in first quarter revenue) and the Data Center Group ($3.1 billion). The Mobile and Communication Group showed revenue of just $156 million in the quarter and the Internet of Things Group had revenue of just $482 million.
To generate the first quarter’s margin surprise then, Intel has continued to invest in chip manufacturing—annual capital spending at Intel is up 144% since 2009—even as most of its peers have thrown in the towel on in-house manufacturing and have joined the ranks of fab-less chip “makers” who outsource actual manufacturing to companies such as Taiwan Semiconductor Manufacturing (TSM.) These companies dropped out of manufacturing because they wouldn’t/couldn’t invest the level of capital spending necessary to sustain Moore’s Law. (Moore’s Law, named after Intel co-founder Gordon Moore and initially appearing in a 1965 paper, said that the number of transistors on a chip would double every two years. That would continue to drive processing power up and processing costs down.) Credit Suisse has called Intel the Last Man Standing on Moore’s Law.
If that’s true, and the first quarter margin numbers say it could well be, then Intel is the only chip company with this kind huge advantage. And that advantage would be enough to let Intel catch up in tablets, mobile, and the Internet of things. (I’d say Taiwan Semiconductor is still on the Moore’s Law path but the company is a manufacturer of other companies’ intellectual property.)
It’s still likely to take Intel a while to generate the kind of market penetration that it needs. The company is projecting flat revenue and earnings in 2014. But I think if the company can continue down this path for another two or three quarters, Wall Street will certainly start to notice.
Intel is a member of my Dividend Income portfolio http://jubakam.com/portfolios/ . (The shares pay a 3.3% dividend and the company is generating plenty of cash so that dividend increases—and share buybacks–are likely.) I’d set a $32 a share target price of Intel by November 2014.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Intel as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.
Terrible day for PC stocks—and it’s pretty much all Microsoft’s (MSFT) fault.
You see Microsoft’s new Windows 8 operating system—the big redesign with a touch screen—was supposed to revive PC demand.
And it hasn’t. In fact it looks like Windows 8 has made a bad situation worse as the redesign has driven away—or at least delayed their purchasing decisions–the corporate customers that are the remaining mainstay of PC demand.
At least that’s the conclusion from market watchers IDC and Gartner. IDC’s newest data, released yesterday, show worldwide PC shipments falling 13.9% during the first quarter from the level of the first quarter of 2012. Gartner’s numbers are only slightly less grim with the company estimating an 11.2% drop.
It’s not just that the numbers are so bad—it’s that they are so much worse than they were supposed to be. Read more
I don’t think it’s wise—or profitable—to ever underestimate Intel’s (INTC) patience. Recent product announcements and news on design wins show that the company continues its long-term attack on markets where Wall Street seems to have concluded that Intel can never win. (Intel is a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ It pays a 4.2% dividend.)
“Never” is a long, long time.
First, Intel announced a slight upgrade on its Atom chip—the Z2580–at February’s Barcelona Mobile World Congress and that was almost immediately followed by news that China’s ZTE, the fourth biggest seller of mobile phones in the world, has decided to use it in some of its new phones. This is an important follow up to Intel’s win with the Motorola Razr I phone last year. Intel still doesn’t have a central position in mobile phone silicon but it is no longer completely locked out of that market and the company even has some momentum. The Atom Z2580 does look like it has closed some of the graphics gap with chips from ARM Holdings (ARM.LN in London and ARMH in New York.)
Second, Intel has beaten out Taiwan Semiconductor Manufacturing (TSM), the largest independent chip foundry in the world, to build chips for Altera (ALTR), a leader in field programmable gate array technology. Read more
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. Read more