INTEL MIGHT KEEP PRICES STABLE THIS SUMMER
Due to its new efficient chip production capabilities, analysts now believe that Intel might be able to avoid its standard round of quarterly price cuts this summer. Intel is now using both smaller chips and larger wafers -- a combined development that allows the company to put more chips on each wafer and leads to lower production costs. At the same time that Intel's costs are falling, the company is seeing overall semiconductor prices stabilize. Intel has cut the price of its chips every quarter over the last seven years.
TODD'S TAKE: With all signs -- including Hewlett Packard's (HPQ, $20, unch.) drop in 2Q revenue -- suggesting that information technology (IT) spending is still weak, it could be a bit premature to say that semiconductor prices will stabilize. We simply need more time to see a sales trend develop. However, the worst of the longest and deepest decline in the chip industry history is now over.
If demand for chips picks up some steam in the coming months, then Intel might be able to hold its Pentium 4 prices stable. While that might cut into its sales volumes a bit, Intel could still post strong income growth on the back of higher profit margins.
The bottom line is that the world's top chipmaker has the technology and manufacturing capabilities in place to make the most of its recent improvements. Intel continues to impress us.
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WAL-MART PROFITS UP ON STRONG SALES
The world's #1 retailer reported an almost 20% gain in first-quarter profits, as healthy consumer spending propelled sales higher from a year ago. Wal-Mart's profit jumped from $1.4 billion, or 31 cents a share, in 1Q01 to $1.7 billion, or 37 cents a share, in 1Q02. The results were in line with analyst estimates. Total revenue rose 14% to $55 billion, with sales at stores open at least one year up 8% compared to a year earlier.
TODD'S TAKE: For a company the size of Wal-Mart -- and in 2001 there were none bigger when measured by revenue! -- this kind of growth is almost unbelievable. But Wal-Mart keeps chugging along. The firm's results got a boost from an accounting change in the first quarter, but excluding that effect its profits were still up 15% from a year ago. The company's focus on quality and low-cost goods continues to lure shoppers from all walks of life. Wal-Mart was on the mark across its businesses in the first quarter, including its international unit, where sales climbed 18%. The one exception was Sam's Club, which saw operating profits stay flat on higher insurance costs. Yet overall this was a fantastic quarter.
Wal-Mart warned that improvements in the economy seem to be slowing. Nonetheless, the company expects to earn 43-44 cents a share in 2Q. It also reaffirmed its full-year guidance for earnings of $1.75 a share. With its stock down slightly since the end of February, this is a great time to add the top retail stock around.
REFINERS FACE TOUGH TIMES; VALERO CUTS OUTPUT
According to a recent report by Salomon Smith Barney, gross margins at the nation's oil refineries have tumbled to fresh lows in recent weeks and most companies are now operating below the breakeven level. Faced with a disastrous combination of high crude oil prices and relatively low gasoline prices, many oil refineries around the country are now beginning to reduce their gasoline output in an effort to conserve costs. For example, Valero Energy (VLO, $40, down 2) this week announced plans to cut production at its 12 U.S. and Canadian refineries by 23%.
What does all of this mean for investors?
For starters, it's going to lead to tight supply and higher costs at the gas pump during the busy summer driving season. Higher gasoline prices not only take money out of consumer's pockets, but they also help to fuel inflation because they lead to higher shipping costs. And as for Valero, the news does not bode well for the stock. The company posted a first-quarter loss of $39 million, or 37 cents a share, in late April, and judging by the looks of things in this industry, further weakness could be on the horizon.
CONSUMERS TO THE RESCUE
We hate to keep repeating ourselves here, but consumers have propped up the economy extremely well over the course of the last year or two, and all the data that we're monitoring leads us to believe that that trend will continue. Business investment spending is the major variable that needs to pick up before the economy can really gather steam. Of course, given that corporate profits have yet to show a meaningful rebound, we think investment spending isn't going to improve until later in the year. Moreover, history has shown that the U.S. economy generally soars out of a recession because of pent-up consumer demand. That's not likely to be the case this time around, however, because consumer spending has remained strong. Citing this and a number of other factors, many economists expect the U.S. economy to crawl out of last year's recession.
An interesting thought: It's entirely possible that pent-up business investment demand could propel the economy out of the doldrums this time around. Of course, given the gross overcapacity problems that are still prevalent among many industries (high-tech in particular), we're not expecting a dramatic turnaround here.
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