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.

Surgery Done by a Bull in the China Shop

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Today is the beginning of the spring quarter and the new fiscal year in Japan. Last night, most of Asia rallied and the Nikkei was up smartly (the Nikkei never hit a new low in the market sell off this spring by the way). A bailout plan in Taiwan for semiconductor manufacturers was bullish for tech stocks throughout the region. A Chinese manufacturing report was dismal, although off the low established last November (when the prices of many commodities also bottomed). European bourses are down this morning and the U.S. market indices gapped down after gapping up yesterday. The market is worried about the G20 Meeting tomorrow and the Jobs Report on Friday. The U.S. government possibly forcing GM into bankruptcy has also reared its ugly head again as well.

The government's current handling of GM is incredibly destructive economically. News has been leaked that Obama thinks a 'surgical bankruptcy' is the best option. If so, that surgery is being conducted by a bull in a China shop. A recapitulation of what is going on:

1. The U.S. Economy has been losing its manufacturing base for the last 30 years and has moved increasingly to a FIRE (Finance, Insurance, Real Estate) economy and this has led to the current implosion of our financial system.
2. Instead of trying to revive manufacturing, the government is trying to drive a top manufacturer into bankruptcy - and somehow this is going to improve things.
3. Sales for automakers are down as much as 50% year over year because of the economy. The U.S. government then tells reluctant car purchasers that we are trying to drive GM out of business and make them worry that if they buy a GM car they will ever be able to get it fixed (this may not be realistic, but it is something that will give the consumer pause and hurt GM sales even more).
4. No one knows how many credit default swaps there are on GM bonds, but the number is probably substantial. A bankruptcy would put them in the money and require that they be paid off. Most of them would have been sold by insurance companies and brokers that are already getting government bailouts and this will require more bailout money (probably many times what it would cost to bailout GM) to make up for the losses.
5. The U.S government just spent $5 billion bailing out auto part suppliers and is undermining that bailout if it forces GM into bankruptcy.
6. There are a large number of current and former employees of the auto industry, its suppliers, its shippers, etc that will be negatively affected by this action.
7. The GM announcement stopped a nascent stock market recovery in its tracks, wiping out billions more from retirement portfolios. The Dow was up over 20% (technically a new bull market) and the government apparently couldn't wait to drive it right back into bear market territory. Treasury Secretary Geithner already caused a major market sell off previously with his handling of Citigroup. If the Obama administration's goal is to keep stock prices down, they are achieving outstanding success.

While I am not a fan of bailouts, I am even more opposed to incompetent business practices combined with unlimited government stupidity. As we have said in this blog before you can bailout no one or you can bail out everyone, but doing some bailouts and not others produces the worst results. What the Obama administration is doing with GM makes no sense on any level - and it does not bode well for the handling of economic matters going forward.

NEXT: The Bull Heard Around the World

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.