From the mod thread.....
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Sorting out the real reason for Intel's drop
mercurycenter.com
BY SCOTT HERHOLD
Mercury News
When I covered the Illinois legislature many moons ago, a grizzled legislator attempted to explain the rules of the game to me. ``Always remember,'' he said. ``There are good reasons for doing something, and there are real reasons.''
By that he meant that politicians, like ordinary people, often took refuge in statements that were persuasive rather than bluntly true. A schedule conflict might be a good reason for not meeting with someone. The real reason: a loathing for the other person.
That lesson stuck in my head the other day when Intel Corp. (INTC) announced that slow sales in Europe meant earnings would not meet analysts' expectations.
Instead of an expected 6 percent to 8 percent increase over the previous quarter, the Santa Clara chip maker said it now expected 3 percent to 5 percent. A waspish market sliced off 25 percent of its value.
I don't doubt what Intel said -- that European sales are slowing. But I wonder whether that's the whole story. In short, I wonder whether Europe is the good reason rather than the real one.
A few reasons for this in a bit. In the meantime, it's worth noting that blaming a weak euro -- or high oil prices -- has suddenly become the rage among companies that pre-announcing bad news.
On Tuesday, for example, Eastman Kodak Co. (EK) announced that its third-quarter earnings would fall as much as 15 percent below expectations. Kodak blamed Europe indirectly, saying a falling euro and rising energy costs had quicker impact than expected.
The day before, Lexmark International (LXK), a maker of laser printers and inkjet cartridges, said the euro's decline would reduce third-quarter sales by $15 million.
If all this sounds familiar, it ought to. We've been here before. During the Asian currency crisis of 1998, all manner of companies -- from farming enterprises to carmakers -- blamed poor results on the collapse of the Asian currency.
Then as now, the problem for the investor lies in separating the wheat from the chaff of this explanation. In the case of many companies -- the semiconductor equipment companies come to mind -- the Asian currency crisis was only too real. For many others, however, it was a convenient excuse.
``Obviously, when you're a CEO, you want to put a positive spin on all corporate news,'' says Mike Englund, the chief market economist for Standard & Poors. ``In a quarter when the euro depreciates, you never can really prove or measure to what degree consumers in another country balked at the price. So anyone can claim that the weakness in their statistics is due to the currency. It becomes a scapegoat.''
That brings us to Intel, which cited a European slowdown but offered no detailed explanation. To be fair, the company didn't blame things just on the euro: It said only that sales in Europe were falling short while they seemed to be holding firm elsewhere.
This explanation is a little like a baseball team that says it lost the pennant race because it didn't win enough road games. True enough, probably. But it omits that it didn't win enough home games to make up for its shabby road record.
In fact, there have been broad-gauged signs of slowing in Intel's business. As Dan Hutcheson, the president of VLSI Research Inc., points out, the price for Intel's high-end chips was softening in August, well before the European issue arose.
``Europe was blamed for the shortfall but it was clear that (the) upside didn't emerge in other areas,'' wrote Goldman Sachs semiconductor equipment analyst Gunnar Miller in a note to investors.
Miller puts his finger on what I think is the fundamental issue: Personal computer makers, stung by component shortages early in the year, gradually have built out a full week's inventory of chips.
That would explain why Intel grew so much faster earlier in the year than Microsoft Corp. (MSFT) or Dell, which typically have shared in the manna brought by 18 percent growth in the PC business.
It would explain, too, why PC makers like Dell, Compaq and Hewlett-Packard Co. (HWP) have clung to their earnings forecasts despite Intel's stumble: In some sense, they're ready to catch up -- even though viewers like VLSI's Hutcheson see potential slowing as corporate buyers wait for the arrival of the Pentium IV.
So is Intel a buy now? Well, consider this bullish note: Despite its recent stock setback, the company -- at least for now -- is clinging to its $6 billion capital spending plan for next year.
``Intel is not taking the foot off the gas when it comes to capital spending,'' Hutcheson says. ``They're still internally betting on a strong year next year. Now they could be wrong. You can't forecast the future. But my sense is that they're not overly concerned about what's happening in this quarter.'' |
