Fourth quarter results from Intel (Nasdaq: INTC) and Mellon Financial (NYSE: MEL) are under our belts, and neither stock took a hit on the news. Like spending a night alone on the Serengeti and not getting whaled on by a lion, that's an accomplishment in today's environment. Let's look.
Intel's results keep stock afloat
Intel reported $0.07 in earnings per share under generally accepted accounting principles (GAAP), and $0.15 per share in pro forma earnings, which exclude acquisition costs. GAAP earnings declined 78% from last year's fourth quarter, but rose 250% from the preceding quarter. At $7 billion, sales gained 7% from the preceding quarter, but fell 20% from one year ago.
Management stated that 2001 was certainly the worst industry downturn it has ever witnessed, but still the most important words in the above paragraph are "earnings." Unlike Cisco Systems (Nasdaq: CSCO) and so many others, Intel remained profitable each quarter of 2001. The following is a snapshot of how difficult the year was, though, compared to recent history:
Year Op. income FCF CFO PP&E* 2001 $1,291 Negative N/A 7,300^ 2000 10,395 5,266 12,827 6,674 1999 9,767 8,225 12,134 3,403 1998 8,379 5,475 9,447 3,557 1997 9,887 5,283 10,008 4,501 1996 7,553 5,523 8,743 3,024 1995 5,252 350 4,016 3,550 numbers in millions (so, $1.29 billion in 2001 op. income)
*property, plant and equipment spending ^approximate
Most important now is the company's forward guidance. Management projected first-quarter revenue of $6.4 billion to $7 billion (compared to $6.6 billion last year). Typically, the first quarter is weaker than the fourth, but the high-end of this range would match fourth-quarter sales. Investors cheered this small bit of potentially good news like you might cheer the first slices of sunlight during a gray rain-swept month.
Management also projects 51% gross margins and $5.5 billion in capital expenditures for the year (down from $7.3 billion last year), but it couldn't predict much else. Intel doesn't see a turnaround yet, but it will be ready when one begins to appear.
We're relieved that capital expenditures will decline this year. Although SEC filings aren't available yet, Intel almost certainly had negative free cash flow in 2001. That happens when you keep spending billions on equipment while your income falls from $10.3 billion to $1.2 billion. (That's the first decline in several years, and what a decline it was.) Free cash flow is important because it's a pure measure of how much cash operations are creating for management to reinvest. Last year's answer: Zip.
At $34, the stock trades at 54 times this year's consensus earnings guess which stands at $0.63 per share (up from $0.52 last year, pro forma). Intel's 2002 free cash flow multiple will likely be much higher. At any rate, the stock isn't cheap, but the company's outlook could pick up later this year. On March 7, Intel provides a mid-quarter update. (The Motley Fool Take had a look at Intel on Wednesday.)
Mellon's results -- hey, good enough
Mellon Financial: This isn't your father's bank anymore. In fact, it isn't even a bank anymore. Mellon divested itself of retail banking to focus on mutual funds and asset management for institutions and loaded people (more politely called "wealthy clients"). As you might imagine, 2001 was a tricky year to manage assets because both interest rates and stocks dropped sharply (in general, they usually move opposite each other).
As such, Mellon fell short of estimates in its first three quarters by 29%, 37%, and 7%. The fourth quarter was the charm: It met estimates. The company saw $177 million in fourth-quarter income from continuing operations, down a tad from last year. For the entire year, diluted earnings from continuing operations miraculously rose to $1.52 per share from $1.47 in 2000.
Financial service businesses require a whole column to comb over results (it isn't about sales, margins, or even free cash flow, etc.), so we'll do that soon. For now, as with Intel and so many other S&P 500 stocks, Mellon looks expensive partly because earnings hopes for the year are low.
Jolly J&J giant reports Tuesday
The steady giant (knock on wood) that is Johnson & Johnson (NYSE: JNJ) reports fourth quarter results on Tuesday the 22nd. Consensus estimates call for $0.39 in earnings per share, up 14.7%, and $8.4 billion in sales, up 10.8%.
For the year, that would bring the company to $1.90 in earnings on $31.7 billion in sales.
The first nine months of 2001, J&J had a record $5.1 billion in free cash flow, so it could end the year with easily more than $6 billion in free cash flow. With $180 billion in market cap, the $60 stock should trade at under 30 times free cash flow, about equaling its 31 P/E ratio and giving it a modest premium to the S&P. J&J will report Tuesday morning. We'll be visiting the active J&J discussion board then.
Tax clarification to a recent column on Campbell
In a recent column discussing our pending sell, I wrote that we couldn't use our Campbell Soup (NYSE: CPB) losses (once we sold it) to offset income until we had capital gains. I should have been much clearer on that. We could legally use our loss in Campbell to offset our other income, be it dividend income or regular income -- just as you may at home. For the sake of this real-money portfolio's records, though, we're going to assume that the Campbell loss is used to offset any eventual taxes on dividend income that we'd have to otherwise pay, and future gains when we do finally sell something at a profit. But we won't assume that the portfolio itself has regular income (like a salary) that it can offset with the Campbell loss. At home you should use any such loss to offset regular income, to the extent that you can, if you don't have capital gains to offset.
I hope that's clearer. Our apologies for any confusion that we (meaning I) may have caused.
Have a good Martin Luther King, Jr. day!
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