No Buffett? No problem for Intel

The chipmaker's fundamentals remain strong even without the Oracle of Omaha.

By TheStreet Staff Aug 17, 2012 10:57AM

By Richard Saintvilus  

 

Instant credibility is what is earned by any company when arguably the best investor in the world, Warren Buffett, owns the stock. In fact, it's one of the highest endorsements any publicly traded company can get.

 

Then what does it say when Buffett dumps the stock? This is what investors of chip giant Intel (INTC) are left to assess upon learning Buffett's company, Berkshire Hathaway (BRK.A), has dropped all its 7.7 million shares of the semiconductor company.

 

It is not unusual for Buffett to reshuffle his portfolio from time to time. For that matter, aside from Intel, it is worth noting he also sold off a significant chunk of his stake in Johnson & Johnson (JNJ).

 

Be that as it may, since he is known to move markets, let's take a look at what is going on in Intel and draw our own conclusions.

 

First, here's the obvious: Intel is no longer growing as it did in the mid-to-late 1990s when, along with software giant Microsoft (MSFT), it rode the personal computer industry to levels unimaginable. Today, that same industry is in a slow decline and giving way to the rise of the smartphone and mobile devices market. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

 

The result of this trend has rendered Intel to the realm of the obscure while raising the profile of its rivals Qualcomm (QCOM) and ARM Holdings (ARMH). But does that mean Intel lacks value and is no longer able to compete? Its recent quarter would suggest otherwise.

 

The company generated net income of $2.83 billion, or 54 cents per share, on revenue of $13.5 billion, topping analysts' earnings per share expectations while meeting its sales forecasts. What I found to be interesting was that the company said that shipments were 87.5 million units for the quarter, representing (only) a 0.1% decline from the previous year.

 

Also remarkable was the company's sequential revenue growth, which was 5%, while its PC revenue rose at a respectable 4%.

 

So with Intel owning 80% of the world's PC business in terms of chip usage, this leads me to wonder if the imminent "death of the PC" has not been grossly exaggerated.

 

Interestingly, its two biggest customers, Hewlett-Packard (HPQ) and Dell (DELL), are also the top two PC manufacturers in the world, yet their stocks' performance do not reflect the actual strength of the PC industry.

 

Essentially, aside from the fact that perhaps its shares are being slightly discounted, it means Intel is grossly undervalued as well. I doubt Warren Buffett would not have seen this. While that should be cause for (some) optimism, it should not immediately remove the potential adverse effect the growing tablet and mobile devices market will have on Intel's chip dominance.

 

While Microsoft's resurgence aided by the launch of Windows 8 will definitely spur Intel, without question what Intel needs to do is figure out a way to get its chips inside Apple's (AAPL) iPhones and iPads while looking for ways to serve Google's (GOOG) Android devices. This is what currently gives Qualcomm and ARM Holdings the advantages that they have.

 

Would Warren Buffett have reconsidered if that were the case? Perhaps and perhaps not. But as Intel's recent quarter showed, its gross margin is not only growing but it shows no signs it has been affected by the current competition.

 

Even more remarkable is the company has shown no meaningful slowdown from the economic challenges in Europe whereas rival Advanced Micro Devices (AMD) absorbed not only a significant drop of 10% in revenue, but also a 40% decline in profits due to poor European sales. This is a testament to the exceptional management team that is leading Intel.

 

For Intel, I think the main concern for investors continues to be how to fairly assess the company's current state and where it is likely heading. When looking at its peers Texas Instruments (TXN) and Nvidia (NVDA) that are trading at inflated valuations, the argument can be made that Intel is harshly undervalued.

 

However, it is worth noting that Buffett did not dump Intel and pick up one of its rivals. In fact he went in an entirely new direction and shored up his holdings in the oil industry.

 

So I tend to think that it was not a case where he saw a problem in Intel. But what the company needs is more time -- enough to prove to Wall Street that it can still provide the growth that it craves.

 

From an investment perspective, the stock is trading under its fair market value, which I have estimated to be right around $32.

 

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5Comments
Aug 17, 2012 12:04PM
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No Buffett? But,... but.... I love Old Country buffett!
Aug 17, 2012 2:09PM
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INTC float is 5 billion shares! Can you figure how little of that was Buffett's 7.7M shares?

Hardly enough to qualifiy for mention; less than 12% of one day's average trading volume.

Takes a lot more than that to move INTC down or up even a tick. It is so stupid that anything Buffett does seems to get headlines in our celebrity-hungry media, no matter how small. That tells you all you need to know about the importance of this "event" to INTC..............none.

Aug 17, 2012 1:50PM
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Maybe he sold because the price of Intel stock went up? 

Intel went from $ 19 in 2011 up to $29 in 2012. An increase of 53% .  

Intels  Intrinsic Value per share might be lower or not much higher than $30 (Graham number is $18 and DCF $30)  so he sold to buy other stocks with low prices under their Intrinsic value.

 If Intel hadn't gone up, he probably would not have sold. 

You shouldn't write about Buffett without considering Intrinsic Value (which he calls "fuzzy" but very important).

The sale doesn't say much about the company, more about the current share price.
Aug 19, 2012 10:39AM
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Warren and Berk don't always make the best deals.....IMO

 

But they "normally" make enough of them, to stay ahead of the game; And add value long term..

And they have slowly moved away from some issues, of buy and hold until you die...?

 

That is the GAME...

Aug 17, 2012 11:48AM
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The result of this trend has rendered Intel to the realm of the obscure? Umm, the PC's Mobile is going to replace Job's PC's Dead crap and Intel's going mobile in 2013-14. Buy Intel in $20-22 range.
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