Intel's Earnings: Not Much Has Changed in 10 Years

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The French saying, 'the more things change, the more they remain the same' tells the story of the last decade of semiconductor giant Intel's earnings. While media commentary was gushing with enthusiasm about Intel's first quarter earnings of 43 cents this morning, it went unmentioned that Intel had also reported earnings of 43 cents per share ten years ago in the first quarter of 2000.  Intel's stock price reached the $75 level in 2000; it is under $24 today.

While Intel's earnings have finally recovered to what they were at the top of the tech bubble, gross revenues have increased by more than 25% in the last decade. In the first quarter of 2000, Intel sold almost $8.0 billion in products, but last quarter it sold $10.3 billion. This improved Intel's operating income from $2.5 billion ten years ago to $3.4 billion today. Quarterly Income Before Taxes was $3.2 billion in 2000, but $3.5 billion last quarter. Whatever Intel earns today has a more significant impact on its per share earnings though. There were 6.7 billion shares of common stock outstanding at the end of the first quarter in 2000, while there are only 5.5 billion today. Stock buybacks during the lean times have paid off for the company.

Some things that haven't changed are the importance of Asia for the computer market and Intel's microprocessor sales. North America ceased to be Intel's largest market long ago. The CFO's commentary today on first quarter earnings noted that Asia Pacific, Japan and Europe performed better than seasonal patterns would have predicted. The Americas experienced a larger than seasonal revenue decline from the fourth quarter. So if Intel's first quarter results indicate economic recovery, as many in the media suggested, that recovery is taking place in Asia, not in North America.

Semiconductors have always been a cyclical business. Stock prices for semi companies tend to decline before peak earnings in the cycle. Intel's stock is up nicely today on its earnings news, so it is quite possible business is still heading up. The longer-term picture on the other hand seems to have changed dramatically. Intel was leading a rapidly growing industry in the 1980s and 1990s. The last ten years have been fairly stagnant, although characterized by significant ups and downs. Based on stock price, the market isn't nearly as happy today with 43-cent quarterly earnings from Intel as it was ten years ago.

Disclosure: No position in Intel

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Why the Stock Market May Be Topping

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Markets hit tops or bottoms when almost everyone shares the same opinion. Current conditions in the U.S. stock market are reaching an excess of bullishness and this indicates a top could be forming. Investors should proceed with caution.

When it comes to market opinion, the majority is usually right and investors should generally move with predominant view in the short term. However, when majority opinion starts to become overwhelming - say less than 20% of investors are bullish or bearish - then herd behavior has taken over and its time to think about stepping aside. At extremes there is no one left to buy or sell, so there is no more fuel left to propel the market in the direction that it has been going. The U.S. stock market has probably already reached that state.

News media coverage is one of the best gauges of whether or not a market has overreached. When it starts to become too positive or negative, the end of the trend is usually near. News coverage for the recent market rally has indeed become extremely positive. When the Dow Jones Industrial Average closed above 11,000 yesterday (April 12th), it got a lot of glowing press reports. This new high for the rally was hit on volume that was below average - an indication of a lack of enthusiasm from market participants. Declining volume has been a serious problem for the rally for a long time now and will eventually do it in.

The dollar has had a significant sell off from around 82 to 80 in the last few days because of the Greek bailout. Money has flowed out of Europe during the crisis and into North America, helping to drive up the U.S. stock market as well as the dollar. A resolution to the crisis will reverse this flow and be bearish for U.S. assets. In reality, the problems in Greece are not over. While a bond auction held yesterday was quite successful in terms of selling the bonds, the interest rates Greece paid were very high - more than double the rates from the January 12th auction for similar debt. Greece's problem wasn't selling its bonds, but the high rate of interest it had to pay on those bonds. So far, the bailout doesn't seem to have fixed the actual problem. While money may no longer be flowing out of Europe, it may not be quite ready to return there just yet. When it does, the U.S. stock market will drop.

Yale professor Robert Shiller has just released an updated version of his historical PE chart for the S&P500. The current level, just below 22, is around the long-term market peak in 1966 and is higher than the PE before the 1987 crash. It is well below the 30 level reached in 1929 and the 44 level reached in 2000 though. Investors should assume that the current 22 number understates the actual PE ratio. Changes in accounting rules during the Credit Crisis have made corporate earnings much higher than they would have been, especially for the financials. The New York State Comptroller's office reported that Wall Street's earnings were three times larger in 2009 than they were in 2007, which itself was an all time record year for earnings. Investors should wonder how earnings could triple from historical highs during the worse economic downturn since the Great Depression. Disneyland accounting along with the federal government transferring money from the U.S. treasury into the coffers of bailout recipients is the answer.

As always, investors should pay close attention to the VIX, the S&P volatility index. A low number indicates investors have become too complacent and the market is likely to start selling off. The VIX fell to 15.23 yesterday and is testing levels last seen in May 2008 and October 2007. The 2003 to 2007 bull market peaked in October 2007 and stocks fell off a cliff in the fall of 2008. Investors were extremely optimistic during the 2007 VIX low, as they always are during a market top.

Disclosure: Long oil.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.