The Hedgehog Looks At Intel
With Handy Comparisons To GE, Dell, and AMD

Update 3/4/98 - Well, it was nice while it lasted; get ready for a thumping tomorrow. Intel warned that due to weaker than expected demand from OEMs (original equipment manufacturers - Dell, Compaq, etc.) first quarter revenue will be down 10% from the fourth quarter (the first quarter had been expected to be flat). INTC also stated that there would be a one time charge and some increase in admin. expenses due to the acquisition of Chips and Technologies.

The shortfall from OEMs appears to be related to a couple of different issues. First, to emulate Dell, the box builders are trying to reduce their own inventory levels, therefore reducing orders to INTC. Second, INTC is coming out with a low priced chip soon, Celeron; the OEMs could be holding off on orders while waiting for this chip. Third, consumers may be waiting to see how low prices go before buying. The silver lining here is that eventually these issues should play out and INTC's sales should rebound. We're unsure right now whether Asia is playing a part in all this.

For the last few weeks, Intel had been bouncing around the near term target we set in January when fourth quarter earnings came out (see below). Concerns over AMD's deal with IBM had kept the stock from holding over the $90 level. Tomorrow, the stock will probably open in the mid-70's. Short term I wouldn't be surprised if it dropped toward the upper-60's. Regardless, we will maintain our position, the fundamentals that make Intel great are still there and the valuations are still good, it's just going to take more patience to see the final reward.

What will be interesting is to see what happens to some of the box builders such as Dell, which has posted huge gains recently and is running at the high end of their normal PE. If there is doubt about the near term growth of some of these companies and the problem isn't just a chip inventory issue, they could get beaten up hard (the whole tech sector will probably take it on the chin tomorrow regardless). On the plus side, this drop could present some tech sector buying opportunities (for those willing to wait out current troubles).

Keep an eye on our Hedgehog Portfolio page where we will be doing regular INTC updates.

Update 1/13/97 - Fans, there was joy in Hedgehogville today because Intel, mighty Intel ... had hit a double.

Intel reported fourth quarter earnings of $0.98 a share, $0.05 ahead of Zacks, $0.08 ahead of First Call, and $0.12 ahead of Thomas Kerlak. Intel had improved results in Europe, lower than expected taxes, and not a huge drop in Asia. Intel was up about $2 in after hours trading.

Tomorrow, the analysts will be busily upgrading Intel, but we've held up tight on this even when the stock dropped into the sixties (though it gave us a nice case of the shakes). So, where will Intel go? The company said first quarter revenue would be flat, R&D and capital expenditures would be up, and expenses down. The company will also take a charge for an acquisition. The important thing, is that the company said that while Asia was a concern, China and India had been good. If the company doesn't think Asia is a big problem, than both the short and long term potential is very good. Intel is trading at about 19.6 times trailing earnings, a slight premium to projections of 17% growth in computer sales. Intel deserves a premium if any company does, and it's certainly at a lower multiple than just a few months ago. So for an off the cuff estimate, Thomas Kerlak, who helped start the Intel price slide, came in 14% low on earnings. Therefore, how about a near term price target of $87, a 14% increase.

Commercial: Want to know more about Intel, consider Inside Intel, available in our bookstore.

Update 10/24/97 - Soon they'll be giving Intel stock away on the street. The price has tanked even more due to concerns about the Asian markets and because Intel decided to delay starting production of next generation microprocessors at the plant they are building in Fort Worth, Texas. They will instead produce these in an Israeli plant where they had planned to make flash memory chips. Apparently, the market for flash memory, used in such things as digital cameras and cell phones, is suffering from over supply. While hardly great news, the microprocessors are the high margin product and it's more important that Intel focus on these than on the flash memory chips.

Contrarians that we are, we still do not think this changes Intel's fundamentally good long term value. Investors in for the long term will find Intel a better deal today than yesterday. The only problem is that it might be an even better deal tomorrow. Short term this stock may be a while in getting back to where it was.

10/14/97 - It would be nice if the moment I recommended a stock it would immediately take off. Most of my recommendations though aren't momentum based and none more so than Intel. Today, Intel missed earnings estimates by $0.03. Big deal! All the reasons I gave below for owning Intel are still valid. Panicky investors will probably drop the stock into the $80's over the next few days. Consider this a buying opportunity. Intel is a big cap company with a lot of earnings potential at a very reasonable price. An unrepentant Hedgehog stands by his earlier recommendation.

10/10/97 - Back in olden times, when our ancestors wanted to be assured of excellent returns, they bought a company called IBM. For years, IBM went higher and higher. People who bought in early became very wealthy. Of course, all things come to an end, and IBM is no longer the bastion of great returns it once was. Fear not, our generation has something just as good; our generation has Intel (INTC).

You wouldn't think this would require an explanation but apparently it does. While Intel is up about 46% on the year, it has been bouncing around its current price for several months (see the chart) while other less deserving stocks skyrocket. What's more, hot shot analysts like Thomas Kerlak (sp) seem to enjoy telling us about how badly Intel will be affected by a soft European market or price pressures from its competitors. As we shall see, none of this matters.

Like every company, Intel has a few problems. One is a lawsuit filed by Digital claiming patent infringement. Rumors have sprung up that Intel will get out of the suit by buying Digital's Alpha line (I've used an Alpha; it's a real pain in the butt but we'll talk about Digital some other time) for $1.5 billion. Maybe, maybe not, if Digital is even willing to discuss that kind of settlement, then the suit shouldn't be too big a problem for Intel.

Intel did have a problem with inventory as they transitioned to the new Pentium II. They had a lot of old Pentiums left and had to cut prices to move them out. This problem should be over with. Then their is the competion...

In the table below, I've compared Intel with GE, another very large cap stock, Dell, a high flying customer, and a competitor, such as it is, Advanced Micro Devices.

There have certainly been a lot of arguments over Dell's value lately and maybe we'll talk about it some other time. What's important to notice here is the projection for Dell's earnings growth, 25% vs. Intel's 20%. Doesn't it seem likely that if Dell does experience this kind of growth selling a commodity (PCs) then its sole supplier of microprocessors (the only thing on the computer that isn't a commodity) is going to do at least as well?

Now the competition, AMD recently announced significantly greater then expected losses and is in the red for the last 12 months. The table doesn't reflect this, instead, the analysts have AMD making a huge jump in eanings in '98. Don't hold your breath. The reason AMD failed to make earning, was that even though its chips were in demand, AMD couldn't make enough of them

And herein lies the key to the whole thing. While the AMDs and the Cyrixs may make a good chip, and they may sell it for less, they can't make anywhere near enough to be a serious threat to Intel. In theory, Netscape could come out with a new operating system, ship one to every PC user within a month, and crush Microsoft. To crush Intel, someone will have to invest billions in new plants and equipment. Who's going to risk that kind of money against such a dominant competitor. If anything, the recently launched antitrust investigation of Intel is more a stamp of approval to Intel's success than a real threat to the company.

Intel's numbers for the last quarter, where they missed expectations, were excellent. Earnings nearly doubled, and the percentage increase in revenues was significantly more than the percentage increase in costs, always a good sign.

So as we've seen, it doesn't matter if Intel faces more competition or the occasionally soft market. They are the dominant player in the hottest industry. Every long term portfolio would do very well to have some Intel.

Disclosure: Intel is the Hedgehog's single largest holding