Kurlak is long KLIC
Intel's Margins Underscore Its Franchise Strength
By Thomas Kurlak
Special to RealMoney.com
01/15/2003 06:58 AM EST
Click here for more stories by Thomas Kurlak
Intel's (INTC:Nasdaq - news - commentary - research - analysis) fourth quarter looked good. Revenue grew 11% sequentially, about 4% more than recently revised Street estimates. And gross margin, as I expected, jumped by nearly 3 points to 51.6% from the third quarter. Earnings of 16 cents a share were up 45% over the third quarter.
That Intel still can earn a 15% net profit margin in this economy is testimony to the strength of its franchise and business model. And that franchise is even stronger, as Intel's market share hit a five-year high at year-end.
Microprocessor average prices (for use in PCs) were up in the fourth quarter, despite Street analysts' claims of weakness and oversupply. And with the introduction of several newer processors, such as the Centrino, which incorporates wireless capability, average prices are likely to trend upward this year.
I continue to expect 2003 earnings of 80 to 85 cents a share and Q4 '03 earnings to reach an annualized rate of $1.13. (And I expect Intel's stock to provide an above-average return this year.) Management's first-quarter outlook statement of sequentially flat-to-slightly-down revenues leaves room for improvement at the midquarter update and is characteristically subdued, which is smart at this stage. But a new head of steam is building, and one quarter this year (I don't know which), Intel is going to blow away the revenues and put to rest the issue of whether a new cycle has started.
Bears will explain away their low earnings miss this quarter by saying it was a seasonal blip. And that Q1 also can't be trusted as a guide of business trends because a reorder surge won't be sustained in Q2. But unlike last year, the economy is heading upward, and semiconductor capacity utilization is back up from 50% to 75%, making it a tighter chip market. And those PCs keep getting older while businesses and consumers are using them more.
Bears also will say that Intel's planned lower capital spending is a negative because it reflects less optimism about the future. But what it really says is that Intel has enough plants for growth of output, and now depreciation charges will start to decline, which helps earnings.
For the semiconductor-equipment companies, lower capital expenditures is a nonevent and should not be a reason to sell those stocks (those who did after hours will eventually regret it). In fact, Intel's capital spending on actual production equipment probably will be up 20%; it's the spending on land and buildings that will be down. And as far as I know, Applied Materials (AMAT:Nasdaq - news - commentary - research - analysis) doesn't sell buildings.
Anyway, it's irrelevant because equipment stocks track semiconductor stocks, and investors expect their earnings to lag the cycle. Obviously, a better outlook for Intel has to be good for Applied Materials. The market always looks ahead.
That is the problem with the bear case: It has failed to anticipate change, and has used current trends last fall to support a negative view when indicators of impending improvement were developing.
I base my bullish long view on the fact that semiconductor usage always grows. What creates problems are recurring inventory cycles that come along when producers least expect it. Those inventories are gone now and demand is picking up for PCs, cell phones and even telecom equipment.
To me, the outlook for the PC sector is bright. This should lead to better times for lots of tech companies, not just Intel. I don't see much analysis of the fact that the U.S. won the PC war, and now it's a U.S. oligopoly made up of Hewlett-Packard (HPQ:NYSE - news - commentary - research - analysis), Dell (DELL:Nasdaq - news - commentary - research - analysis) and Apple (AAPL:Nasdaq - news - commentary - research - analysis).
The Japanese have no real position. Price wars don't help gain share like they did before. And surveys show that consumers still rely on their PCs more than any other tech product, including cell phones.
--------------------------------------------------------------------------------
Tom Kurlak is the former semiconductor industry analyst for Merrill Lynch, now retired. For 19 consecutive years, Kurlak was on the Institutional Investor All-Star Team until his departure for Tiger Management in February 1999. At the time of publication, Kurlak was long Applied Materials, Intel, National Semiconductor, Kulike& Soffa, Nokia and Western Digital, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Although he cannot answer questions about individual securities, Kurlak appreciates your feedback. |
