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Posted 5/2/2006
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Intel looks like a sinking ship
First-quarter sales were weak, inventories look bloated, its financial position looks worse and the outlook doesn't inspire. Who would invest in such a tub?
By Bill Fleckenstein
From the reports of original equipment manufacturers, chipmakers and distributors, it's clear that throughout the tech sector, inventories are on the high side. That's why certain commodity parts, formerly "tight," are now working their way into the spot market. Last week, all the reports of companies that I follow were, on balance, slightly worse than expected.
High-octane optimism
But the news was basically ignored by tech bulls, who appear to be so infatuated with the Fed-is-done theme that nothing really bothers them. They seem to believe in some variation of the idea that we're just finishing a tightening cycle, la 1994, and the glory years of 1995-2000 lie directly in front of us.
Nothing could be further from the truth, in my opinion. But this fervently-held belief seems to be what's powering the bullish enthusiasm. It explains why nothing has been able to take the tape lower.
Which means that for the market to sink, we will need either: - Further negative macroeconomic developments, or
- Exhaustion.
When looking for exhaustion, one must be alert to possible reversals. Therefore, I will be much more focused than usual on the market action for the next couple weeks.
Related news and commentary on MSN Money
What's inside Intel: agita
I'd like to follow up on my long-running critique of Intel by stating that its recent results were abysmal. The company made its earnings estimate, but that's because it lowered the tax rate, vs. what had been expected. Without the lowered rate, it would have missed its estimate.
More importantly, Intel (INTC, news, msgs) took estimates down radically for this quarter. It's cutting capital expenditures and research and development, and it has lowered margins for the second half of the year. So, those folks on the lookout for the fabled hockey-stick earnings rebound should note that even the eternally optimistic Intel is not prepared to say that that will happen.
Third-degree cash burns
As for the balance sheet, there was further deterioration: a huge drop in cash, year-over-year; bloating receivables; and ditto accounts payable. Were it not for the latter two maneuvers, Intel's cash would have been even lower than the $9 billion it is today (down from $16 billion a year ago). And let's not forget that about six months ago, Intel did a convertible deal that raised $1.7 billion. Of course, this enormous cash-burn explains why Intel has cut its share repurchases by about half.
Last but not least, the company's inventory was up, and yet its revenues were lower both sequentially and year-over-year. Thus, while things looked okay on the surface, one can see the rot that lies beneath.
But the biggest elephant in the room: If Intel thinks it's going to have a strong second half, based on its new parts (which it does), what in the world is Intel doing with all this inventory of old stuff? As I have been saying for a long time, Intel is out of control. It's a disaster in the making. And all that is before taking into consideration the fact that (a) the PC market is slowing down and (b) PC makers with Intel-based parts are losing market share.
Going 'down' with the chip
The latter fact comes via a report by Gartner Dataquest, which on April 19 released its results for the past quarter. As Gartner noted, while both Hewlett-Packard (HPQ, news, msgs) and Acer (Taiwan ticker 2353.TW) experienced strong PC-sales growth in that quarter, Dell experienced virtually none. The reason for Dell's (DELL, news, msgs) loss of market share, according to Gartner: Its continued policy of sticking with Intel parts. Since Dell is Intel's biggest customer, Intel has obviously lost market share.
There is literally no way to put lipstick on this pig, though lots of stock bulls tried to do just that, in the wake of Intel's news. The battle cry is some variation of: Things are so bad at Intel, they've got to get better -- although, as one dead fish noted in a recent research report: "Just because everyone knew it would be bad doesn't make it good." As I have been saying repeatedly over the last year, Intel is a sinking ship -- and not likely to turn around anytime soon.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Bill Fleckenstein was short Intel and long Intel puts.
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