Stacy Rasgon, an analyst with Bernstein Research, recently lowered his price target (via Barron's) on PC processor giant Intel (NASDAQ:INTC) from $29 to just $26, representing around 19.5% downside from current levels as of a recent check of the share price.
The analyst concedes that it's unlikely for Intel to negatively pre-announce its first quarter results, no doubt due to the fact that when Intel does this, it aims to do so ahead of its "quiet period." However, Rasgon does think that Intel could miss current sell-side analyst estimates (which, as of writing, sit a little below the midpoint of the company's guidance).
Let's take a closer look at Rasgon's reasoning.
Rasgon first notes that Intel's inventories "have ballooned over the last year." According to the company's form 10-K filing with the SEC, Intel has seen its raw materials, work in process, and finished goods inventories all grow significantly year-over-year. Total inventories came in at $5.167 billion at the end of the most recent quarter, up more than 20% from where they were a year prior.
Rasgon argues that these relatively high level of inventory could put the company at risk of needing to cut back factory loadings. Such a decrease in capacity utilization would, as Rasgon points out, have a negative impact to the company's gross profit margins.
On Intel's earnings call in January, Intel CFO Stacy Smith said that the company ended the fourth quarter with "a little more inventory than [he] was expecting and a little higher than [he] would like."
Smith attributed these inventory levels to two factors. The first is that Intel's unit shipments were weaker-than-expected. Intel was able to avoid a revenue shortfall as a result of the company selling, on average, more expensive products, however. The second, per Smith, is that Intel saw its manufacturing yields on its latest 14-nanometer manufacturing technology improve.
Smith's expectations as of the most recent call were that Intel will bring its inventory levels down during the second half of the year.
A "spike" in receivables
Another point that Rasgon makes is that Intel saw its accounts receivables increased by nearly 17% sequentially. He notes that this is the second time in the last ten years that there was a spike in receivables during the fourth quarter.
"The last time this happened in a [fourth quarter] was last year, which was subsequently followed by a sizable [first quarter] cut," the analyst writes.
Rasgon's view and price target
At the end of the day, Rasgon indicated (via Benzinga) current estimates for the company's second quarter look "too high" and that a "meaningful reset" in Intel's full-year revenue outlook might be in the cards.
His new $26 price target is derived from applying a 12x multiple to his 2017 full-year earnings-per-share estimate of $2.18. It's worth noting that this figure is significantly below current Street estimates of $2.64 and the lowest estimate from a Street analyst on record.
I agree that estimates will probably come down, but PT probably too low
I generally agree with Rasgon that there's a solid chance that Intel will bring down its full-year numbers. Intel smartly baked in a good deal of conservatism into its first quarter and full-year guidance that it issued back in January, but it may ultimately prove to have not been enough given a number of the reports around PC demand/builds .
However, I would think that a 12x multiple is probably too low. Certainly the company's PC business is a drag on its overall financial performance, but note that even with worries around the PC and with the fairly common view that Intel could very well guide down for the year, the stock has managed to continue to trade at a nearly 14x trailing twelve month multiple.
I think 13-14x Rasgon's 2017 estimate is likely more reasonable, which would imply a price target of between $28 and $31 per share in the case that those estimates prove correct. Not exactly a screaming buy if they're correct, but not really a compelling short, either.