Harry and Mark,
To understand your comment of, "To me the most gratuitous piece of information the company floated was the long term gross margin of 50%.", I think we have to go back to last Jan. when Intel announced their Q4 96 earnings, and put the +/- 50% long term GPM comment in context. If you recall, Intel and the market, were surging in prices. Irrational exuberance was running rampant, (see my post of Jan. 22 on the Intel thread).
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Intel had just beat analyst's First Call estimates handily, and Gross Profit Margins that quarter, were exceeding 62%. Yet Intel faced a transition year to MMX and to Pentium II, and in order to grow revenues at the same rate of growth, it was clear that Intel had to enter new businesses.
Therefore, if it was evident that if Intel were to enter new businesses, they could not maintain the same 60% + GPM. Further, with the apparent need for Intel to increase the manufacturing, and sales, of lower profit motherboards, they had to lower investor's GPM expectations. Hence, conservative as Intel is, and in order to give themselves breathing room, the company dampened expectations for the future with more realistic GPMs.
Perhaps in hind sight, and in view of Intel's Q1 beating even the 62% margin chalked up in Q4 96, they announced the +/- 50% statement, prematurely. However, in January, when many of the high flying tech companies were also issuing similar warnings, Intel stated that they could not keep up with this same torrid pace, and that investors should expect GPMs to be closer to historic ranges of 50%.
If you recall in January, it was for this reason that I posted that I sold Intel Calls against my Intel core position, However, a week later, and after speaking with other investors, (Paul E. and Jack Rains included) it appeared that IBM was even more vulnerable. Hence, in order to hedge myself against a correction while Wall St. adjusted to the expectations of lower GPMs, I bought IBM Puts.
Well as we all know that correction did come. And during this correction my IBM Puts served me well. I might add, those Puts continue to serve me well. (I don't expect IBM will come anywhere near matching Intel's, or Microsoft's stellar performances, when IBM announces its Q1 earnings next Wednesday.)
So, back to Intel's comment of expected 50% long term GPMs during Monday's analyst conference call. As I recall, I believe their comment was only reiterated only in response to one of the analyst's questions. The prepared Intel text only stated that GPMs going forward would be +/- a few points from 60%. I am told that it was only that day that the words revealing expectations for Q2 to be at the upper end of that range, were added. This therefore, implied that Gross profit margins would remain above 60% for at least one more quarter, and this, I believe, was BIG NEWS. News that for some reason, was not picked up by Erika Klauer, or by Drew Peck, in their broadcast remarks. I should like to point out, as I have for the last couple of days, I still have not seen other analyst reports picking up on Intel's add-on improved outlook statement. However, to his credit, at least Tom Kurlak of ML, in his amended analysis incorporated this new guidance in his forward earnings estimates.
As I have consistently written on these BBs, I look for new news, or new expectations, that may not be priced into a stock to guide my short term investment decisions. It was for this reason, and despite the fact that I don't think the correction for the overall market is over yet, that I completed buying Intel Calls Wednesday, when Intel was at 128 _, and at yesterday, when IBM was at 139, I bought more IBM Puts, as a hedge.
Regards,
Jules |
