Drip
Portfolio Report
Wednesday, February 4, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Feb. 4, 1998) -- Yesterday we began to look at Intel (Nasdaq: INTC) with the intention of learning what we can about the company's performance in 1997, while searching for information that isn't already intuitively accepted by half-knowledgeable investors. (For example, "Its sales are rising, its net income is climbing, it's a great company..." That type of stuff.)
Today we continue on our Quest For Ultimate Enlightenment On Intel, although until the company's 1997 10-K report is released next month, we can't quite look at Intel as in-depth as we'd like to, but we can still accomplish quite a lot.
No more chatter...
Tuesday we reviewed Intel's price-slashing nature on its MMX and Pentium II chips. These are the two new microprocessors that Intel released in 1997 that basically replaced the company's existing product line. In relation to price-cutting, we were reminded that the current gross margins of 59% are expected to settle around 50% in the long term, and perhaps at around 55% in 1998. Where the gross margin number lands depends on the product mix and volume.
So how can Intel continue to increase net income while cutting prices on key high-margin products? The obvious answer is for the company to increase volume and efficiency on the products for which it is cutting prices, and diversify the product mix to increase sales of other high-margin products. Last year the company grew sales 20% to $25.1 billion, while net income increased 33% to $6.9 billion. The company's production facilities ramped up new microprocessor production in record time and with record efficiency, while competitors Advanced Micro Devices (NYSE: AMD) and National Semiconductor (NYSE: NSM) are having production troubles.
What is Intel selling and to whom?
In late 1997 Intel reorganized itself to cover all computing business segments, from low-end PCs to high-end server equipment. With record sales volume on high-end Pentium II microprocessors, it's clear that the low-end sub-$1000 PCs are not going to kill the sales of high-performance machines. Either way, Intel is addressing all PC markets and the company accelerated the price cuts on its lower-end Pentium P5 chips, too. At one point Intel was going to let the competition have the low-end market, but management quickly changed its mind, showing that no company is infallible and that perhaps one of the best qualities that management can have is flexibility. (In large part thanks to Intel, you can right now buy a good computer relatively inexpensively -- though with 333 MHz computers now available, 233 MHz prices will steadily decline even more.)
Although over 80% of revenue at Intel is derived from the sale of silicon that goes into a computer, the company also has growing business in networking, videoconferencing, and other segments. Intel is also moving forward in the computer graphics market with the recent acquisition of Chips & Technology. And in the last quarter Intel let it be known that its new Merced chip should be ready for production in 1999. This microprocessor is being heralded as the next big thing in the business, with an architecture that supports all viable systems, and is thought to be Intel's trump card in the high, super high-end market where the competition has often led.
Meantime, at the so-called "middle-level" of the PC sales spectrum, Intel of course has a monstrous lead, and it is only a matter of time before large corporate upgrades might begin in earnest again. Statistics show that one-half of all corporate PCs use 486 CPUs or older, while 20% of corporate PCs use 386 CPUs. Hard to believe. So unless companies plan to switch to a fledgling network computer platform, or thin-client systems (for which Intel has its own solution), 1998 and 1999 could be just "swell" (to use a Wise analyst term) for PC sales in this country.
When Intel's 10-K is released we can really dig down and see exactly what the company sold last year, and how much. There's plenty to do in the meantime as we progress forward. Tomorrow we'll look at the company's numbers for the year and see what kind of cash flow Intel is generating, how its research and development expenses are shaping up, and we'll consider the company's capital expenditures (people commonly think that Intel is a capital-intensive business, when in fact it isn't much more capital intensive than Coca-Cola.)
To close, I phoned Harris Trust today and learned that we (and every other DRPer) bought Intel on February 2 at $83.3975 per share. Having sent only $50, we bought 0.5995 shares, bringing our total number of shares above eight and our cost basis to $79 and change. The stock continued its recent rampage today, rising above $87. Yesterday the Drip Port passed into positive territory overall for the first time, already covering the start-up expenses incurred. This has happened much sooner than Randy and I ever expected, but the port will have more expenses ($15) soon in order to begin the Campbell Soup DRP. Still, the Drip Port is up over 13% for the year. See you on the Drip Investment message board. Then, tomorrow, the Quest for Enlightenment continues.
Fool on!
--Jeff
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