Did Intel Really Blow Away Earnings?
smartmoney.com
... Wall Street clearly anticipated a blockbuster performance, bidding the stock up each day this week — with the exception of Thursday, when investors burned by Intel disappointments over the previous three quarters suddenly got cold feet and shaved a few points from the stock. A thick stew of positive analysts' comments started simmering on Monday and bubbled until Thursday. Friday, just about everyone on the Street was hiking earnings forecasts, pumping up target prices and issuing more upbeat remarks about the company's prospects.
But a closer look at Intel's report shows that there may be more to that 69-cent number than meets the eye. And it's worth noting that as of today's closing, Intel's multiple has jumped to 38.6 times 2000 earnings projections — some 75% above its average level over the past five years, according to Zacks Investment Research. While it's clear the chip giant had a strong quarter, it probably wasn't as strong as this week's surge in the stock would indicate. It's the kind of situation that makes a short-seller drool.
Why do we think so? About four pennies of that 69 cents came from a much-larger-than-expected gain on the sale of securities during the quarter. As it happens, Intel has for years had a program of investing in companies that it hopes will contribute to the development of the Internet economy.
The idea is to encourage that growth as a way of creating more uses for its semiconductor products. But Intel fully expects to profit from the portfolio as well. At the moment, reports Warburg Dillon Read, "Intel Capital" includes stakes in more than 350 companies and is worth around $8 billion. Intel had told analysts it would sell $280 million worth of that equity in the quarter, but the number ran to $508 million — or four cents a share — "due to higher-than-expected gains," the company said.
Given all this, "people's interpretation of the 69 cents is peculiar, to say the least," says SG Cowen analyst Drew Peck. "People are actually swallowing the 69-cent story."
Peck isn't what you'd call an Intel bull (he has a rare Neutral on the stock). But he is voicing concerns that were shared today by other analysts who asked not to be named. His worry is that earnings become clouded when gains from securities sales — for Intel or any other company — become accepted as part of operating results. "If you start making forecasts for Intel based on that model, the company can report anything they like anytime they like by selling securities," Peck says. "In effect, Intel has become a hedge fund."
Terry Ragsdale, a Wall Street Journal All-Star analyst from J.P. Morgan, wasn't that harsh, but he agrees that the 69 cents overstates the company's operating strength. "I thought it [Intel's report] was fine. It was kind of what we were all looking for — no better, no worse. To be brutally honest, it was almost boring."
Intel's business situation going forward is fairly clear, Ragsdale explains, adding there was little in the way of new news in the company's quarterly report. There had already been talk about a couple of pennies upside to earnings, and — without the gain from equity sales — he says that's what investors got. While Ragsdale (who rates Intel a Buy) upped his earnings estimates substantially, he explained in his report that more than half of his hikes are due to nonoperating items like Intel Capital. As for the much-discussed catalysts for Intel's stock this year — Microsoft's (MSFT) upgrade of Windows 2000 and an uptick in corporate sales now that Y2K isn't a worry — Ragsdale is a bit calmer than some of his colleagues.
"It's going to be a decent year, but is it really going to be that different than the past two years?" Ragsdale asks. "I don't think so." It is true, he says, that investor sentiment has definitely turned in favor of Intel. And with the stock lagging the broader market, all it took was a good quarter to reignite it. The fourth quarter was it.
Ragsdale notes that the income Intel realizes from its hefty portfolio of investments isn't anything new. Still, he admits it's the first time the gain has added enough to the bottom line that people have really had to think about it. Since the investment portfolio is a stated part of the company's core strategy, Ragsdale says he'll include these gains in his estimates for Intel and value the stock on that basis. But he says it definitely confuses matters.
Will Intel's example encourage other companies to include large gains from stock sales in their operating earnings? Who knows? But Peck, for one, isn't comfortable with Intel's bottom-line results being so closely tethered to the bull market. "It opened up a can of worms," he says. And those worms could easily make a stock this rich in historical terms look suddenly unappetizing.
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