All,
Just prior to the end of the last two quarters, we have witnessed a new honesty phenomenon being displayed by technology companies who anticipate short falls in anticipated earnings, for their upcoming closing quarter. To soften the "blow" of disappointment, these companies rush to pre-announce their expected setbacks, else, they be accused of not being forthright with analysts and investors. It is therefore somewhat unfortunate, that during this two or three week period, and prior to the end of the quarter, (sometimes while many healthier companies are in their quite periods), that all those companies associated their industry, get painted with the same
broad brush. Thus, I believe, that once again the trigger for the most recent sell off of Intel, PC manufacturers, semiconductor and technology companies, in general, was as a result of these warning signals sent by a comparitively few.
Such, I believe was the case over the last week with Quantum, Lattice, and now Madge. Over the last two days I attended the Technology Conference sponsored by Bear Stearns. At that conference I went to the Quantum’s presentation. There, I asked the question that I had posed to this SI Intel thread last Friday in my #1844. Could it be that Quantum was predicting weak PC demand because of its unique set of circumstance and its previous large dependence on Apple Inc? Quantum responded that at one time they provided 70% of Apple’s disk drives for desktops. And that while Apple now only accounts for 10% of Quantum’s revenues, it might explain Quantum’s prediction of a slowdown in PC demand. In other words this may not be a slowdown in overall PC demand, but rather a slowdown in demand for Apple’s PCs. In addition, Quantum had predicted a smooth growth rate of 17 to 20% for this year. What they say now, is that in this current quarter, billings will be about flat. My interpretation of this is that Quantum did not heed Intel’s guidance for flat Q2 revenues and overbuilt Quantum disk drives. Because of the shortening of lead times and because demand for Apple Computers were predictably down, Quantum
was caught with an over supply of inventory. Therefore, Intel’s guidance of relatively flat revenues for the Quarter and PC demand, remains in tact.
In addition, yesterday I spoke with Intel’s Investor relations department. While John Hull is traveling, and therefore I was unable to speak with him, I was told the following;
---The $1.08 earnings estimate for Intel’s Q2, which was reported when Intel’s Craig Barrett appeared recently in Japan, was the average First Call analyst’s estimates and NOT attributable to Intel. As I wrote here previously, it would have been highly irregular for Intel to pre-announce earnings estimates.
---Intel is still maintaining, at this late date, its original guidance to Wall Street that revenues would be about flat with Q1 and that gross margins would be improved to about the 51-52 % range.
Based on this guidance, I continue to use, for myself, an earnings estimate for Intel’s Q2 of $1.13 to $1.15. My high estimate is based on my belief that PC demand remains strong in Asia, the overall cost of PC systems has continued to come down (unpredictably just three months ago) and will be a positive for Intel, an increase in market share, and gross margins improving to the 51 to 52 % level.
It will take time for investors to accustom themselves to the new honesty phenomenon described above. However until that occurs, more knowledgeable investors should view these recent days as a fortunate buying opportunity. I define a buying opportunity as one in which there is an imbalance between Wall Street’s perceptions and reality. Now, I do not pretend to be able to predict when the stock market will experience an overall correction, but I do believe that in the case of Intel, and probably many others, CSCO for another, the pullback in prices are not supported by reality of the company’s condition. Therefore, there will be those that will be quick to say, "I told you so" because Intel’s price has pulled back to the same point, (70), as when they first warned that INTC was overpriced. However, these individuals should know that this latest price downturn is not the result of their predicted fundamentals occurring, or because PC demand has falling off, but rather because of the new honesty phenomenon, and more external, or macro-economic,
forces at work.
Therefore, I continue to view Intel, at this price as an excellent buying opportunity, for long term investors. However, I would have no quarrel if potential Intel buyers, (although I would not risk it myself), wanted to gamble that momentum could carry INTC down further. But recognize that waiting for Intel to pull back more is a gamble. A gamble that Global investors will not recognize for some time yet what we recognize NOW.
Jules |
