Volatility increases with increased fixed cost. volatility increase is not due to increases in COGS but to shift in mix of things in COGS specifically caused by increase in employee #. In Intel's instance the huge scope of its increased fixed costs are being missed by analysts who look solely at S,G&A and R&D lines. What I was getting at is that the Gross Margin line at Intel is much more volatile and volume sensitive than in a decade. This only multiplies the impact of more widely known "operating leverage" factors like S,G&A and R&D. Note, Operating leverage is NOT financial leverage; operating leverage is above EBIT line and financial leverage is the I of interest and the impact on T taxes. If intel had debt volatility would even be worse. But even the laziest of analysts know to give lower multiple to levered companies
Hiring people to produce more product is not bad. they are just another form of resource allocation. If they don't produce resulting in slower growth in product sales than growth in people cost that is very bad. Even in this day and age of low job safety, additional personnel is a more fixed cost than most give it credit with salaries, standard bonus, options, fringes, space, eqpt, support, etc.)
On a bell curve, Intel's gross profit, ebit and net income and eps volatility has gone way up. The likelyhood of an earnings miss (and in good times a big earnings surprise) has gone way up. The volatility of intel's options has not adjusted to this. And since the analyst community has not adjusted expectations and multiples down for this greater cyclicality of cash flow and earnings, earnings misses are going to occur way more often than earnings surprises. one day people will catch on here but not until many lose alot of money. |
