Here is an excerpt from Briefing on the report of Intel's earnings. There should not be anyone very surprised at this outcome. I expected Intel to meet consensus at the best, which would still result now in a pattern of poor year-to-year and sequential earnings for a company that has Intels' spetacular earnings growth history.
I think it is important to keep something here in mind. When a company goes through its period of significant earnings growth, it is a curve and not a straight line. So earnings growth *accelerates*. Analysts estimates tend to be based on straight line projections. IMO that is why successful companies tend to go through a *series* of earning surprises, and not just *one* or *two* lone earnings surprises. However, earnings can deaccelerate too, as surprising as this can be to some people here. When earnings deaccelerates, guess what happens? It does not form a straight line either. So earnings *disappointments* become likely. Intel's earnings have been deaccelerating for multiple quarters now forming a pattern. IMO the analyst across-the-board downgrade of companies postponed the pattern of earnings disappointments that was to unfold earlier.
This pattern of slowing earnings growth for Intel has been so obvious that it is hard to miss. The observant market follower would of seen that this was due to more than the Asian economic crisis, as if the Asian problem had just become an event of the past. We are talking about the broader economic picture here that centers on the U.S. economy. If anyone here is for the first time becoming aware of Intel's slowing earnings growth and its implications, I suggest that you were caught up in irrational exuberance. First clues came when the analysts had to do an across-the-board downgrade of companies which included the S&P 500 just for many of the companies in later quarters to beat their earnings estimate by one penny. This included the high tech sector. This should of been a huge signal to the market follower that something is up here. Perhaps it worthwhile to keep this pattern of slowing earnings growth in mind when you find companies that have garnered high sentiment due to earnings acceleration that starts to report lower earnings growth.
Also I want to note that the defensive issues have been a good part of what has been participating in this rally, not the cyclics. Interesting! Hints have been all over the place of a slowing economy and the markets growing awareness of this condition for some time now, an economic development that would impact the market once it shows up as a reoccuring pattern of negative news in the form of slower earnings growth and earnings *disappointements*. The market has just been going through its normal phases of denial in coping with this growing relaization as I have mentioned in earlier posts. Remember the formula: growing negative market sentiment that is becoming pervasive plus news that breaks in the direction of the negative sentiment equals market adjustment. This is confirmed by money flow. Stock prices will then follow.
Economic slowdowns do not happen all at once across the spectrum of industries and their individual companies. It is not as though someone has the job to call all the CEOs up and say: " OK guys. We all have to work now in placing a brake on our reported earnings growth starting with this upcoming round of earnings reports. We all have to do this together now! Lets pull this together and make it happen! So does everyone have the game plan??". And if anything will support a rounding top for the market, it would be an economic slowdown that becomes more and more obvious over time in the form of news items that the market crowd will eventually respond to.
But then there is the present liquidity angle to the market that needs to be considered. This in itself can bouy the specualtive enthusiasm that has been a part of the market for some time now. That is why following the technicals of the market is very important. Still it is very important to keep one eye on the bigger picture that goes beyond the technicals of the market. This was there will be fewer surprises and disappointments experienced by the market player.
Just my opinions! Comments welcome.
Bob Graham
Updated: 14-Jul-98
AFTER THE CLOSE 7/14 ******
INTEL (INTC) 80 11/16 -1 11/16. If a company reports lousy earnings in a forest and no one hears, is there a sound? Intel's numbers are lousy, there is no way around that. Nevertheless, the stock has risen from 70 to over 80 in the past two weeks, and now the stock is down only 1 1/2 in after hours trading. Intel reported second quarter earnings of $0.66 a share. That is 2 cents below the First Call consensus and well below the $0.71 to $0.73 talk of recent days (whisper numbers). Earnings are also down 28% from year ago levels and there isn't any sign of a turnaround through the end of the year. The company says only that second half revenue will be "greater" than the first half, which is hardly encouraging given that second half revenues have averaged gains of 13.4% over the first half in the past eight years. Q3 revenues were put at flat to slightly higher than Q2, compared to average Q3 gains of 4.7%. INTC also says margins will rise a couple of points in the third quarter, but that's an increase off of a lower than expected Q2 figure. The company's revenue and margin forecasts suggest that INTC will earn about $0.71 in the third quarter. Currently, the First Call number is $0.76, so this is essentially a warning that the third quarter will be below expectations and well below the year-ago EPS of $0.88. So, Intel will have flat revenue, margins below previous estimates, and a fourth straight year-over-year decline in profits in the third quarter (the fourth quarter is likely to mark the fifth straight year-over-year decline). This is not what is expected of a high growth company. Simply put, the numbers are below expectation for the current quarter, and indicate worse than expected numbers through the end of the year. The numbers aren't good. The only question is now, do they matter, and if so when? For now, everyone still wants big name "leaders" but this leader is now trading at 25 times trailing earnings with earnings going down. Close your eyes and buy, or will you hear a crash if the fundamentals ever count again?
15:30 ET ******
INTEL CORP. (INTC) 80 5/8 -1 3/4. The street is anxiously awaiting the company's second quarter earnings report, due out after today's close. According to First Call, the consensus estimate calls for a gain of $0.68. But the whisper number has been steadily climbing over the past couple of weeks and now sits in the $0.71-$0.72 range. Even if company lives up to whisper number, there won't be much to cheer about (other than fact company didn't announce awful news). At the upper end of the whisper range, company would still be posting year-over-year and sequential declines of 22% and 11%, respectively... Not the stuff that dreams, or high-tech growth companies, are made of. Headline figure isn't the market's biggest concern, however. Street will be hanging on company's forward looking comments. Just hearing that revenues are expected to accelerate in Q3 and Q4 won't be enough, or at least is shouldn't be, given that company's third and fourth quarters are historically strong. If company doesn't forecast at least average Q3 and Q4 revenue growth of 4.7% and 11.9%, stock could lose some of its recent luster. Given the preponderance of earnings warnings from other chip and chip equipment companies, and the ongoing financial crisis in Asia, Briefing contends that the risks are high that the company's revenue forecast will prove disappointing. And with PC demand growing fastest in the sub-$1000 market, in which Intel faces stiff competition and relatively thin margins, we don't hold out much hope that margins will improve significantly either. Delay of Microsoft's NT 5.0 also to have an adverse impact on margins, as Xeon sales are likely be weaker than expected. Xeon chip seen as key to reversing bearish margin trend. On the plus side, reduced costs and possibility of an aggressive stock repurchase plan could help offset some of the negatives. Nevertheless, Briefing expects stock to have a tough time extending its technically driven rebound much longer. Resistance is at 86, while downside risk is to the 70-68 area... For more on Intel, see today's Stock Brief.
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