OT *** Fred Hickey's shorts [excerpt - NETL SNDK INTC DELL]
online.barrons.com
For the record, the Roundtable met Jan. 9 in Manhattan
Hickey: Sure. I have three shorts and three longs, just to show I'm a balanced guy. I'll start with the shorts because they are more fun. The first is NetLogic Microsystems, priced around $29. It is a favorite of momentum players, chart gazers and "get shorty" types that ran up this and a lot of other tech stocks at the end of the year. The stock is up 60% since October, 140% since it came public in July 2004. The company makes TCAMs, ternary content-addressable memory chips. They go into networking equipment. When NetLogic's products came out they had an early lead, but that is lead is diminishing. This is a commodity product. Cisco [CSCO] accounts for 70% of NetLogic's business. IDTI [Integrated Device Technology], the market leader, has a stronger product and NetLogic is going to lose share.
How expensive is NetLogic stock?
Hickey: The P/E on trailing earnings is 39. The P/E for this year's earnings is 30, yet the forecast EPS growth rate is just 12% in 2006. The stock sells for seven times sales and 8.4 times book value. There has been a lot of insider selling -- half a million shares in the past six months. My second short is SanDisk, which Barron's wrote about negatively last year. I think my timing will be a little better.
Thanks for the compliment.
Hickey: SanDisk has been tough to short. It's running up on rumors it will have blowout earnings when it reports Jan. 26. The stock was up 152% last year, to 63, and 18% in the first week of January, to 74. It is the world's largest supplier of flash storage cards. It sells primarily NAND flash, used in MP3 players and digital cameras. The stock sells for six times book value, six times sales, 42 times trailing earnings and 32 times '06 estimates.
[Hickey]
Hickey: "Dell had a terrible quarter, and may be forced to consider using AMD chips."
If the consumer slows in 2006, the whole industry will be under pressure. Many NAND flash players in Asia, including Samsung, are expanding production. We are seeing a slowdown in the retail flash-card growth rate. Some traders of memory are dumping their flash products now. There is a chance we'll see a blood bath. SanDisk, too, has had insider selling. There were 23 insider sales in the past six months, of nearly a million shares. Also, the company is involved in a number of lawsuits involving threats to its patents. Royalties account for 40% of profits, and that royalty stream might not stay intact. The company lost a recent court case, and the stock got hammered after running up wildly in anticipation.
What is your third short?
Hickey: Intel. Some people see it as a value stock. I don't. Intel's profits come from the mature PC [personal computer] market, which has seen three years of double-digit unit growth. This was the replacement cycle. With pricing pressure intense, PC revenue growth has been in the single digits. A slowdown will put the industry in the red.
Black: Intel sells for around 15 times earnings. Dell [DELL] sells at a higher P/E. If you think the PC business is going to crater, why don't you short Dell as opposed to Intel?
Hickey: I am short Dell, too. Intel is being beaten badly by AMD [Advanced Micro Devices], a stock I have owned for some years. Even Intel fans know it is going to lag this year, and maybe longer. [Last week Intel reported fourth-quarter results below expectations, and issued a downbeat outlook. AMD, on the other hand, turned profitable and reported a 45% jump in revenues.] Intel still has 80% of the business and used to be able to overwhelm competitors, primarily AMD, when AMD was only a low-end chip maker. Now, AMD has the better products. Dell is the world's largest PC vendor. It is the only Intel-only shop, which is a problem. Dell had a pretty terrible quarter and may be forced to consider using AMD chips. It would be a terrible blow for Intel if Dell announced a switch. Michael Dell made some interesting comments at the Consumer Electronics Show, alluding to the use of AMD chips. It was the company's strongest wording yet. Intel is expanding capacity, as is AMD. Even if there isn't a slowdown, there could be a 20%-25% oversupply of processors.
Black: What is your estimate for server growth? That drives demand for Intel, too.
Hickey: Competition from AMD is pressing Intel on the server side. Server revenue growth isn't all that great.
Gross: Isn't China the ultimate producer?
Hickey: China has its own chips, but they are low-end. AMD is hitting Intel in high-margin servers and notebooks. Interestingly, AMD is making moves to license its technology to the Chinese and to India. It may develop a joint facility with a company called SemIndia. It is looking to Asia for potential help in manufacturing. This market has been controlled by Intel for a long, long time, which is why Intel's gross margins are so high. Slowly but surely, AMD is becoming a threat. Intel's market cap is $160 billion. It sells for four times sales. For many years, in the mid-'Eighties to 'Nineties, it sold nearer to two times sales. Now it's pretty pricey.
Tell us about your longs.
[snip] |
