Drip
Portfolio Report
Tuesday, February 3, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Feb. 3, 1998) -- Every three months we'll cover Intel's quarterly numbers close-up, even if we do so weeks after the earnings announcement. For the next few days, we'll look not only at key criteria from the fourth quarter (announced in mid-January), but we'll also look at 1997 as a whole.
There's a great deal to know about this cash-spewing giant. Last year Intel (Nasdaq: INTC) bought back $3.4 billion of its own stock while still adding $2 billion to its cash, ending 1997 with $9.9 billion in the bank. But these numbers are in the press release on the Web. We want to look at numbers and facts that the company itself doesn't highlight so prominently. We already know many of the great things about Intel, so over the next few days we'll be looking for anything that might challenge our preconceptions.
For instance, in the third quarter that we reported on in October of last year, we saw research and development costs rising much more quickly percentage-wise than revenue. This isn't necessarily good or bad -- it could be either -- but it's something to keep an eye on. We'll see what this number did in the fourth quarter and for the year.
We're also closely monitoring how continuous price cuts in Intel's main products are driving volume, and then we're looking at that in relation to resulting profits. CPU volume hit record levels last year, but due to lower prices the fourth quarter earnings per share were actually down from the prior year. As we've seen, though, the results were strong enough that the stock has done nothing but rise since the earnings announcement. Increased sales volume (specifically though, volume that increases at a quicker pace than the industry growth rate) represents increased market share, and when a company earns as much money on every sales dollar as Intel does, sacrificing some profit for volume is seen as a smart long-term strategy for market dominance.
Intel's initiative of reducing the cost of every generation of chip steadily over time has been accelerating, and its latest Pentium II price cuts have come ahead of schedule. One result is that competitor National Semiconductor (NYSE: NSM) is hurting. On February 2, the company announced that it anticipates an 8-10% sequential decline in revenue. Its Cyrix chip sales are suffering from production difficulties, according to the company, but almost certainly they're also suffering from the steep price cuts at Intel. Economies of scale at Intel allow for prices that prohibit smaller companies that are trying to match them from ramping up and selling product with much success, at least in terms of profitability. While Cyrix will see lower revenues, Intel had higher fourth quarter revenue even with much lower prices being charged per chip. And this price squeeze for the little guy is only beginning.
Intel sees itself steadily driving the 59% gross margins that it achieved in 1997 down to about 50%, give or take a few points. Gross margins measure the manufacturing "profit" for a company (it represents the cost of goods sold, compared to the price at which they are sold). If Intel sells a chip for $100 and earns $59 gross profit on the chip, the company has 59% gross margins. In this case, it cost Intel only $41 in manufacturing costs to make the chip that it sold for $100. After administrative, marketing, and operational costs are deducted, Intel earns $27.70 for every $100 that it charges for a chip. That's a greater percentage than Coca-Cola earns on every sales dollar of Coke. Intel had 27.7% net profit margins in 1997, compared to Coca-Cola's 22%.
Because everything that an investor learns compounds on top of itself, and since companies shrink or grow chronologically through a chain of events, the earlier that we begin to learn, the more that we'll know going forward, and the more context that we'll have. We'll refer back to Intel's previous quarter and our reporting on it several times over the next few days, and next quarter we'll be referring back to this coverage. Each time we'll learn a little bit more and have a larger base of knowledge on which to build.
We'll continue by looking at Intel's overall growth (and details of it) and the company's concurrent expenses tomorrow. If there is a topic or question that you'd like covered regarding Intel, please post it on the Drip Investment (Drip companies) message board. We have ongoing discussions there in which we could probably all learn much more than we could from this column alone. (By the way, Intel rose today because two analysts covered the stock with "buy" ratings.)
Fool on!
--Jeff Fischer
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