Is Intel About to Get Hit by a BRIC?

Last month, Intel (Nasdaq: INTC  ) cited emerging markets as a key reason for its better-than-expected earnings and outlook. According to management, market researchers IDC and Gartner undercount emerging-market PC sales. That's understandable: Unbranded PCs garner greater market share in emerging markets.

Intel also said Brazil -- the "B" in the popular BRIC acronym -- is on track to become the third-largest PC market. With growth slowing in China, could Brazil be the engine that keeps the PC market -- and Intel -- going?

Not so fast
Growth in Brazil appears to be decelerating. The yield curve in Brazil recently inverted, a signal that investors fear that the economy will slow. In June, Brazil's industrial production fell a surprisingly large 1.6% from May. On Aug. 2, the government announced a slew of actions meant to counter that outcome, including an attack on "unfair" imports and a protectionist "Buy Brazil" policy for government purchases. At the same time, the country is having trouble containing rising inflation that reduces its purchasing power.  

How did it come to this? Capital inflows chasing once-strong growth and high interest rates sent Brazil's currency, the real, up by more than 12% versus the U.S. dollar over the past year. That has driven up the cost of Brazilian exports, hurting demand for Brazilian products. (At least the strong currency effectively reduces the cost of imported products, such as Intel chips.) A rigid labor market and infrastructure bottlenecks contribute to stubbornly high interest rates.

High-tech versus just tech
Last month, your Foolish servant noted that emerging markets are separating high-tech from just tech companies, a plus for Intel compared with some other tech companies. Truly high-tech offerings can't be designed or built in a garage. Examples include chips from Intel and Advanced Micro Devices (NYSE: AMD  ) , hard drives from Western Digital (NYSE: WDC  ) and Seagate (Nasdaq: STX  ) , and semiconductor foundry services from Taiwan Semiconductor (NYSE: TSM  ) . In contrast, Dell (Nasdaq: DELL  ) and Hewlett-Packard (NYSE: HPQ  ) compete with locals that can assemble a PC in a shack.

Foolish takeaway
Emerging markets and cloud-data centers have contributed to Intel's earnings growth even as PC growth slows. The company is a market leader, with a 9.5 P/E ratio and a whopping 3.9% dividend yield, At that valuation, the stock could handsomely reward investors. But slowing growth in BRIC countries such as Brazil and China threaten to take some bloom off the emerging-markets rose. Investors who wait for that to become evident may be able to get into the stock at an even better valuation.

What do you think … will slowing growth in BRIC countries slow earnings growth at Intel? To help you keep an eye on the situation, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding these companies to your Watchlist now:

Fool contributor Cindy Johnson owns no shares in any security in this story. The Motley Fool owns shares of Intel and Western Digital and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.  


Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 07, 2011, at 10:14 AM, Aviq25 wrote:

    Relative to US & Europe BRIC and other emerging countries will continue to grow faster then the mature markets. Companies like Intel with strong global sales and exposure to those markets will do Well.

    HP is well positioned to grow in BRIC markets. Dell is still trying to manage BRIC from Austin delaying decision making (got to keep the HQ staff busy) with lack of investments in staff or acqusitions in emerging markets.

  • Report this Comment On August 07, 2011, at 10:00 PM, SilverSilhouette wrote:

    I've followed most analysts reports on Intel's performance prior to their quarterly earnings. Most of the time (if not all the time) Intel has trumped the Street's expectations. Either Intel management's assessment that the Street truly does not understand the business, or there is something else sinister going on.

  • Report this Comment On August 08, 2011, at 2:13 PM, rmp410 wrote:

    What is the deal with INTC today? Markets are down over 4% but INTC is sitting pretty at the previous day's close.

  • Report this Comment On August 09, 2011, at 3:16 PM, choc101 wrote:

    Interesting as I just read this concerning Intel and it's long term prospects.

    http://seekingalpha.com/article/285805-intel-an-opportunity-...

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