MORNING BID: Intel, dead letter stock

Jan 16, 2014 13:47 UTC

Thursday’s earnings will be headlined by Intel’s report after the closing bell. The longtime supplier of chips to personal computer makers will likely confirm, once again, that the market for PCs just ain’t so hot right now, even if it improved a bit at the end of 2013, and that it will mostly keep driving shareholder value by, well, buying those shares itself.

Morgan Stanley analysts note that Intel’s forecast for overall unit declines is “more negative than a year ago, and is, in fact, the most negative full year forecast they have ever given,” with an expected decline of 4 percent for the year. While the stock hasn’t been hurting, with a 26 percent advance in 2013, its recent gains put it in range of resistance from $28 to $30 that has acted as a ceiling since early 2004. So, for such a prominent company, Intel has basically been dead money for the better part of a decade now. (It trailed the S&P last year, even with those gains. )

Morgan Stanley notes it prefers the companies with more diversified exposure – industrial, automotive, communications infrastructure “Ultimately, Intel continues to be relatively expensive for a company with reasonably low growth prospects,” they wrote in a research note this week. Still, it’s notable that Starmine sees the stock as a bit undervalued at this time, putting an intrinsic value of $32 a share on the stock.

For years, Intel was the barometer for chipmakers, shifting the entire sector on its words, but its influence in the PC world, while still having an effect on stocks out of Asia, has diminished. That’s because it’s not really a part of the smartphone market and has become more noted for its dividend yield and its plans as a serial repurchaser of its own shares.

The company slowed those purchases in 2013, as the stock price has risen (for 2011 and 2012, Intel was a massive buyback company). It still has the ability to buy back another $3.7 billion in shares under the existing “repurchase authorization limit” after spending $91 billion in the last 23 years on buybacks. Of course, it borrowed $6 billion in 2012 for more buybacks, so this tech giant, once cutting edge, is now more notable for financial engineering.

MORNING BID: On earnings, things to like, and not like

Jan 13, 2014 14:32 UTC

The market’s meandering performance so far in January has brought out a bit of the worrying (the first down 5 days of the year since 2005, and all the other various “indicators” that point to things not working out in 2014, even though it’s early for this sort of thing).

But the December jobs figure, however weather-addled, holds investors back a bit and adds to the bit of malaise of late because investors are staring at the priciest market in about seven years (trailing P/E ratio is near 15, per Thomson Reuters I/B/E/S) as earnings start to come down the pike. Of course, the S&P is only down 0.3 percent so far this month, so it’s not a full-blown selloff.

As with all things equity market, there are reasons for hope (what would the stock market be without optimism?). Those relate to expectations that companies will start to discuss the possibility of increased capital expenditures and, failing that, use some hoarded cash to buy back more shares, which, while a signal of rampant financial engineering, at least helps investors in terms of per-share growth.

Morgan Stanley, in an early Monday note, is particularly focused on the industrial, tech and consumer sectors, looking for “signs of backlog extension and book-to-bill ratios above one” as signs that demand is improving. We’ll get some of that this week with Thursday’s earnings from Intel and Friday’s report out of General Electric, though most of the week’s important names are in the financial sector, where the real test will relate more to lending and trading.

Goldman Sachs expects sales growth of more than 5 percent this year, an optimistic view when considering the current Thomson Reuters consensus of about 3.8 percent revenue growth. Again, margins will need to be watched, particularly pre-tax, pre-interest expense margins, which at least gets at the situation for various companies before line items that can be played around with. For what it’s worth, the early reporters (those that came before former Dow component Alcoa) beat consensus estimates by 0.5 percent, according to Morgan Stanley.

What’s less hopeful: the fourth quarter negative-to-positive ratio, which is at its worst since 1996, or the usual gamesmanship that comes with earnings season, where earnings results “beat” expectations that have already been lowered and really aren’t much more than a sign that people aren’t great at forecasting in the first place. With this sort of thing, beating expectations ain’t such a biggie, while slipping below forecasts is going to look really kind of ugly.

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