Why Intel is on a spending binge

PC sales have been sluggish for a while. That's why the company's planned capital budget might be a head-scratcher.

By Jim J. Jubak Jan 18, 2013 8:25PM
Image: Circuit Board -- Datacraft Co Ltd, imagenavi, Getty ImagesWhen I added Intel (INTC) to my dividend income portfolio on Jan. 11, I wrote that the stock had tumbled in the last 12 months on fears of the continued slowdown in the PC market. And I said that I saw signs that Intel's foundry business, the business of making chips for other chipmakers, was starting to pick up speed. The growth of that business could transform the way investors thought of Intel again, I added.

Well, both those trends, the bad and the good, have been in evidence in the last few days.

On Jan. 17, after the close of the New York markets, Intel reported fourth-quarter earnings of 48 cents a share, 3 cents a share above the Wall Street consensus, on revenue of $13.48 billion (versus the $13.53 billion consensus.) Gross margins in the quarter came in at 58% against the company’s guidance of 57% (plus or minus two percentage points.)

As expected, it was the PC group (63% of revenue) that killed the quarter. Revenue from that unit at Intel fell 1.5% from the third quarter and dropped 6% year over year. Those numbers are worse than they seem since Intel’s PC business traditionally reports 5% to 7% revenue growth in the fourth quarter.

Guidance for 2013 wasn’t any worse than Wall Street had expected, but no better either. The company told analysts to look for revenue to grow in the low single digits. That works out to a range of $53.9 billion to $59.4 billion in revenue for the year. (Wall Street projections are at $54.4 billion.) Gross margins will come in at 60% (plus or minus two percentage points.) That would be a drop of about 2 percentage points from 2012. The drop is mostly a result of start up costs on new 14 nanometer production lines.

The big surprise -- and one that left analysts scratching their heads -- was a large projected increase in capital spending for 2013. Intel will spend $13 billion next year, well above the official Wall Street estimate of $10 billion to $11 billion and even further above the unofficial "whisper" estimate of $8 billion to $10 billion. Much of the spending seems to be dedicated to equipment for 14-nanometer and 10-nanometer production that would add to capacity in 2014-2015.

Why, analysts wound up asking, would a company that is experiencing falling revenue on lower PC chip sales plan to spend so aggressively on equipment?

The answer lies, I think, in a Jan. 17 story from Bloomberg that Intel had signed Cisco Systems (CSCO) as a customer for its foundry operations. (Neither Intel or Cisco would confirm the deal to Bloomberg.) Intel already sells its own chips to Intel, but the new deal would, for the first time, have Intel manufacture chips designed by Cisco. This deal would be Intel’s first foundry agreement from a major chip user. The only companies that Intel has announced to data are three small designers of programmable logic and networking chips: Tabula, Achronix Semiconductor, and Netronome Systems.

Intel’s shares closed Friday down 6.3% to $21.25. That has moved the yield -- the reason
the stock is in the dividend income portfolio after all -- to 4.1% on trailing 12-month dividends. On the recent quarterly dividend rate of 22.5 cents a share, the dividend yield is 4.3%.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Intel as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Tags: CSCOINTC
15Comments
Jan 19, 2013 9:50AM
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Jim Cramer is sayig to sell Intel --- I have a lot of Intel in my portfolio and I am holding on to it. I side with you. Intel is being counted out way too soon !  In the meantime Intel has rewarded me nicely for just holding on to their stock. Long Term - Intel is a winner.
Jan 19, 2013 12:18AM
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Intel's building out capacity because they know that once their Atom 3d 22nm comes on line it will enable $500-600 Ultrabooks to replace all existing notebooks and tablets plus go head to head in smart phones with chips from Nividia, Qualcomm and Samsung.  It would surprise me to see a Nokia smart phone and tablet running W* and WP8 with Intel Inside by the end of 2014. These will be quad core devices capable of doing what an i3 or i5 Mac or Windows notebook does now with a touch screen tablet for a screen. Take a look at Lenovo's Yoga 11 and 13, which were sold out for holidays, or Intel's own Northcape device displayed at CES 2013.
Jan 20, 2013 8:18AM
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What I would like to know is: What is going on between Lockheed Martin and Intel behind closed doors. From my personal experience from working in the IT field in various countries around the world, I believe Intel Corp. is the most important company on this planet.

Feb 1, 2013 1:44PM
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Some people belong to the rah rah team of Intel, others not so much.  I think the rah rah team is just that a rah rah team.  I think Intel ahs a rough road to drive with PCs in decline.  I think they will evolve into other markets, but the combined growth of those markets an the PC market make great growth or even good growth tough.  If you have your major product line loss say 5% each year and lesser product lines growing even 15% a year the total growth is small.  For this reason I think the rah rahs are over done nd the naysayers are over done for the above reason.
Feb 1, 2013 1:41PM
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V_L says companies build stuff to brake right after the warranty expires.  I think there are way to many people out there who grab ahold of every stupid thing uttered for no reason than it feeds their bitter sad inner self, because it feeds an agenda, and just becaue they want to be angry.  Just plain stupid and unproductive.   Yes, I would agree that at one time things were built better than today.  But you buy a PC with a one year warranty and are still running it 6 or 8 years later.  Hmm?  Did that out last the one year warranty?  Yes it did.  Most things do out last their warranties and not the other way around, but yet this stupidity of "planned obsolesence" continues.  And again quality of a lot things could be better, but clearly most things out last their warrnaties.  But some people just love to be angry.

Jan 20, 2013 7:33PM
Feb 1, 2013 1:46PM
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I think Microsoft will have an even tougher run on this road of the PC decline.  They have thrown tens of billions of dollars into hundreds of business and have not turned one of them into any kind of an income driver.  They still are a PC SW company.  Up till now they have been unable to change that, can they do it now?
Jan 20, 2013 12:42PM
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Not. Most technology built today have non-functionality built into them. They break just after the warranty ends, forcing a new purchase. When times were better, this didn't matter as much because we were okay buying as long as income was consistent. That isn't remotely where we are now but the engineered failures happen like clockwork. IF you were involved in the retail and post-retail of technology, you'd know that fewer of us are willing to keep buying things that break just to check our Facebook and play a few video games. A reminder that the i-Phone 5 is a retail failure and parts supplies have been stopped. Tech sales dropped 5% since this time last year. The rest is smoke and mirrors.
Jan 20, 2013 12:33PM
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Intel is an interesting example of a business that could have been constantly and consistently good but listened to analysts and Wall Street instead. Intel makes computer chips. Computer chips are made out of sand. Make them consistently and with quality and demand remains constant. The analyst comes in and tells you to terminate personnel and make zillions more offshore AND YOU THROW THEM OUT and go private. Everything Intel branched out into was a deviation from consistency and quality. We'll forget them soon and be dealing with an all-offshore because- while the Founder might have been able to establish legacy consistency and quality, the hired-in slug with the Wall Street education never could or would. We are destroying ourselves by believing socio-pysychopathic executives have "talent". Intel made it using sand (a zero-cost raw material) and that STILL wasn't enough. Think about it.
Jan 20, 2013 12:27PM
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"DALLAS — A pickup truck used by former President George W. Bush at his Texas ranch was sold for $300,000 at an auction on Saturday after he donated it to benefit a charity that serves U.S. military families. The 2009 Ford F-150 King Ranch 4x4 SuperCrew was sold as part of the Barrett-Jackson auction house's sale of collectible cars in Scottsdale, Ariz. The auction house did not disclose the identity of the buyer."

 

The big appeal of the Dubya-mobile is that- no matter what gear you shift it into, the vehicle takes off backward and runs itself into a ditch.

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