There's a whole lotta shakeup going on in Washington today, as both Treasury Secretary Paul O'Neill and White House Economic Advisor Lawrence Lindsey have submitted their resignations, reportedly at the request of President Bush.
Though the president is enjoying unprecedented popularity, his advisors have become worried that the lagging economy will come back to haunt him, much as it did his father in the early '90s. With unemployment at its highest rate in nine years and a recovery that just won't seem to take hold, Bush decided take some action.
The outspoken O'Neill has been a constant thorn in the president's side and a lightning rod for criticism from both parties. He described an economic package from his fellow Republicans as mere "show business," opposed Bush's stance on foreign tariffs, said the Enron situation underscored the "genius of capitalism," and after the terrorist attacks predicted the Dow would hit an all-time high within 18 months.
The White House is currently working on replacements.
In today's Motley Fool Take:
- Intel's Ups and Downs
- Quote of Note
- Cisco's Shenanigans
- Discussion Board of the Day: Cisco
- IBM Gets Rational
- Shameless Plug: Give a Little Bit
- Quick Takes: United Airlines, Verizon, Cable & Wireless, AT&T
- And Finally...
In a word, valuation. Even with the higher sales guidance, Intel is en route to earning no more than about $0.50 per share this year. At $18.75, the stock trades for a current year P/E of 37.5, or about a 91% premium to the S&P 500's estimated 2002 operating earnings P/E of 19.6.
Intel bulls argue that the current high P/E reflects temporarily depressed "trough earnings." But neither last year's earnings nor next year's prospective earnings provide much evidence that we're in a short-lived trough.
Last year, Intel earned $0.52 in pro forma earnings. This year, as mentioned before, the number is expected to come in around $0.50. And next year, analysts are currently expecting around $0.60. None of these numbers is anywhere close to Intel's 2000 earnings of $1.51, and no one should expect that those bubble earnings will be repeated anytime soon.
People seem to forget that Intel's ability to earn premium margins is dependent upon rabid demand for the latest and greatest chip technology. Throughout the late 1990s, when everyone wanted the fastest Pentium chip possible, Intel was able to earn gross margins consistently above 50% and often around 60%:
Year Gross Margin 1995 51.8% 1996 56.0% 1997 60.3% 1998 54.0% 1999 59.7% 2000 62.5% 2001 49.2% TTM* 49.7%
*trailing 12 months
We're in a period now, however, where the supply of adequate computer horsepower has finally caught up with demand, and thus Intel's pricing power is impaired. It'll take another technology boom equivalent to what happened with PCs in the 1990s before the company sees 55% gross margins again.
Given that no such boom seems at all imminent, Fools would do well not to pay more than a market multiple for Intel. If it becomes clear that the company's 50% gross margins are not going away anytime soon, the stock would be more appropriately valued at 20 times current free cash flow per share of $0.62, or around $12.
"Success always occurs in private, and failure in full view." -- Anonymous
It came so fast that you needed to really pay attention to catch it. Fortunately, some sharp-eyed folks on the Fool's Cisco discussion board (free trial required) caught Cisco
Well done, folks. Pay attention, because this is important to anyone who places executive credibility high on the list of characteristics to look for in a company.
In the meeting, Chambers refused to give revenue guidance on the upcoming year, but he did say he's now optimistic that things will get better. Then he said, "Two years ago, I was the pessimist of the industry. I was predicting a 100-year flood. Today, I'm the optimist."
To which we call "shenanigans!"
Chambers did nothing of the sort. In fact, almost exactly two years ago, he is quoted as standing by his aggressive 30% to 50% revenue growth targets for the company, even as its peers were quickly ratcheting back their own rates of growth. And the "100-year flood" line came as part of the rationale that Cisco used in 2001 in writing down more than $2 billion in inventory -- inventory that, supposedly, would not have been stockpiled at nearly the same degree had Chambers truly been a pessimist.
There was no prediction. It was an excuse for why Cisco hadn't seen the drop coming. I don't know if Chambers was quoting for his hagiographer or what, but his claims to have been a pessimist and to have predicted the flood aren't supported by facts.
[Read more about Cisco in Matt Richey's Cisco's Successful Strategy.]
Read what fellow Fools are saying about Cisco CEO John Chambers. What do you think of Cisco's leadership? Do you read between the lines of companies' CEO letters? All this and more on the Cisco discussion board. Only on Fool.com.
IBM will shell out $2.1 billion in cash in exchange for Rational shares at $10.50, marking a 29% premium over yesterday's close. Shares of Rational, not surprisingly, were up over 25% today. The purchase will be IBM's largest software acquisition since it bought Lotus Notes for $3.5 billion back in 1995.
Rational is no fly-by-night concern. IBM, which has had a lengthy relationship with the company, actually bought a stake in the 21-year-old software maker in the late '80s, which it sold in the early '90s. The companies have tinkered with the idea of an acquisition on and off throughout the years, according to IBM.
Bulking up its software and services department has been, and will continue to be, an important goal for IBM. Currently, software revenues make up about $13 billion of its annual $80 billion in sales. Big Blue isn't moving away from hardware altogether, of course, but it does want to boost its share of the software market.
The acquisition of Rational, with a projected $650 million in 2002 revenues, will certainly help achieve that goal. Software developers use its products to create, customize, and test programs used for internal business processes, as well as for embedded use in devices. There's a $9 billion market for that kind of software, and market researcher International Data Corp. expects it to grow to $15 billion over the next four years.
Rational will join IBM's existing stable of software companies -- including Tivoli, WebSphere, Lotus, and DB2 --as a new division and brand. Mike Devlin, Rational's CEO and co-founder, will remain in charge and report to Big Blue's group executive for software, Steve Mills.
IBM expects the deal to affect earnings in 2003 by "a few pennies per share." The purchase won't have an impact on 2004 earnings at all and should add to the bottom line in 2005.
If we each gave just five dollars, we could raise millions to save thousands of lives. 'Tis the season to remember those less fortunate, and the Fool has a great way for you to help others. Be part of Foolanthropy 2002, and ensure others' holidays are as happy as yours.
Moody's Investors Service downgraded Cable & Wireless'
Three giants of American business -- AT&T
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