All,
As a long term investor I am constantly on the lookout for aberrations between an event and Wall Street's reaction to that event. Such was the case with today's reaction to Intel's Q3 earnings announcement yesterday. To be sure I would have preferred for Intel to announce earnings above the $.88 reported. However I note the following items in Intel's Q4 earnings report, that seem to have been missed by most analysts who follow Intel.
---Intel reported an increase in R & D expenditures in Q3, to $586 Mil. This was an increase of some 30.1 % vs. a year ago's Q3. However, if Intel had chosen to keep their R and D expenses at
the same cost as a year ago, (as IBM has been doing in its recent quarters), at $449 Mil., Intel's earnings for the quarter would have been 4 « cents higher, or $.925. This would have beaten First Call estimates by « cent. But even if Intel had just increased R & D by the same 19 % as their revenues grew, over a year ago, earnings would have been $.90. Therefore, I ask why didn't Intel want their earnings to be higher in Q3 when they could have easily produced same?
---Intel bought back 2.5 Mil shares in Q3, at an average price of just over $100 per share. Now, there were just two short periods that INTC's price was above $100,.just before DEC announced its suit against Intel, and just before the FTC announced its investigation of Intel. Therefore, why would Intel pay top dollar to buy back their stock unless they believed their stock was undervalued at the time? Certainly, if they believed there was going to be an earnings disappointment in Q3, they would not have bought their stock when they did? My interpretation is that Intel was confident of their earnings going forward at that time, but only later delayed their earnings in Q3 until a later quarter.
---Intel's raw materials inventory and finished goods inventory were actually down sequentially in Q3, despite revenues increasing sequentially. The only reasons that I can come up with for this phenomenon was that Intel made an inventory adjustment in the quarter. This I believe was done so as to accelerate moving out older classic Pentium's, and to adjust to their OEM's new "build to order" manufacturing model, (i.e. CPQ following a Dell method of manufacturing). Further evidence of this can be found in the decrease of Intel's average-days-sales-outstanding, by 4 days, to
43 days from the previous quarter. Therefore, both of these reasons would seem to suggest that the inventory adjustment was an aberration and a one time event that should not carry forward into future quarters.
In my estimation the 9 % reduction in average-days-sales outstanding probably accounted for another 5 cents in Intel's earnings shortfall for the third quarter.
---As for Intel's decrease in gross profit margins to 58 % in Q3, from Q2's 62%, I think that can be explained by the larger sale of Pentium II cartridges (at little or no profit), and an increase in the mix of motherboard sales for the quarter. The later, I believe, should abate going forward.
In conclusion, I believe that the market overreacted to Intel's Q3 earnings and that Intel was overly conservative in its guidance going forward to Q4. Consequently I bought INTC Jan 95 Calls today.
I welcome any comments on my analysis and remind the reader, that as always, I reserve the right to change my mind at any time, and/or to be completely wrong in my views.
Jules |
