Trim, trim, trim. Wall Street has been a busy barber lately with Intel
As reported on CBS Marketwatch, the Bear Stearns analyst wrote: "Intel's competitive position remains strong, but PC demand has remained sluggish. Intel is well positioned to capitalize on a recovery in the PC market [but] that appears unlikely until sometime in 2003. We think Intel is a good investment for investors with a 12- to 18-month horizon."
I'm skeptical of this view. What exactly will spur a recovery in the PC market in 2003? I'm guessing it's the same nebulous force that was supposed to bring a recovery in the second half of this year, right? By now, it should be evident that PC growth is stagnating, and this economy isn't showing the potential for a strong rebound. Is there any reason to believe next year's earnings at Intel will be materially higher than this year's? I don't think so, and that's why I'm short the stock (via put options).
Intel is not the economic engine it once was. Average annual sales growth over the past five years is 4.9%. The company's ROIC has dwindled each of the past five years as well, and now stands at only 8.8% for the trailing 12 months through June.
Nevertheless, investors continue to price Intel as if the FY03 earnings estimate of $0.80 is a shoe-in. The credibility of this estimate is the only thing holding Intel at its current perch of around $18.20. At that price, the stock trades for almost 23 times the 2003 estimate. In and of itself, that's not exactly cheap, and it looks lofty if you consider the very real possibility of that estimate continuing to come down. This year's earnings are currently expected at $0.55, which is only three cents higher than last year's. What if Intel could only muster, say, $0.60 next year? In that case, the stock is trading at a 30x forward multiple. That's rich.
Historically, Intel has made most of its money by selling leading-edge technology at a premium. But now we're well into a period of lagging demand for the latest and greatest technology, and that's hurting Intel's margins. Until there's a catalyst to spur demand for the most advanced technology, Intel's margins will likely remain under pressure.
I personally consider Intel's fair value to be closer to 20 times its 2002 estimate of $0.55, which would put the stock at $11. Read Bill Mann's recent article to learn why he's choosing to sell Intel from the Rule Maker Portfolio.