Intel: Don't Buy the CAPEX Head Fake

EVENT: Intel (INTC) Sees 2009 CAPEX “Flat To Down Slightly” Y/Y Vs 2008 $5.197B
CAUSE: Primarily For Migration To 32nm Node
IMPACT: Positive “Head-Fake” For Semi Equipment Companies
ACTION: Continue To Avoid Semi Equipment

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SUPPLY CHAIN EVENT TRACKER

11.18.08 Customer HPQ guides FQ4 revenues -5.9% below Street expectations
11.20.08 Customer DELL reports FQ3 revenues -8.6% below Street expectations; no guidance
12.1.08 Supplier TSM guides Q4 revenues -8.5% below Street expectations
12.4.08 Competitor AMD guides Q4 revenues -22.9% below Street expectations
12.9.08 Supplier NVLS guides Q4 revenues -3.7% below Street expectations
12.18.08 Supplier ASML guides Q4 revenues -8.8% below Street; Q1 revs -56.3% below Street
12.19.08 Supplier LRCX guides FQ2 revenues -7.5% below Street expectations
12.23.08 Supplier MKSI guides Q4 revenues -11.1% below Street expectations
1.5.09 Supplier VSEA guides FQ1 revenues -9.9% below Street expectations
1.7.09 Company INTC guides Q4 revenues -6.7% below Street expectations
1.12.09 Supplier KLAC guides FQ2 revenues -5.0% below Street expectations
1.13.09 Compettior NVDA guides FQ4 revenues down -45% Q/Q

EVENT: 2009 CAPEX GUIDANCE. On its Q4 report Thursday, INTC announced that 2009 CAPEX would be “flat to down slightly” Y/Y vs 2008 levels of $5.197B.

CAUSE: 32nm MIGRATION. On its conference call, management stated that the “predominant majority” of 2009 CAPEX would be spent on its migration to the 32nm node.

IMPACT/ACTION: AVOID POSITIVE HEAD FAKE. The Street is currently looking for CAPEX to be down Y/Y. So while INTC’s guide of roughly flat Y/Y CAPEX may appear positive at first glance for semi equipment companies (many semi equipment names are trading up despite the NASDAQ being down slightly at the time of this writing), we remain negative on semi equipment and believe that investors should not buy this positive “head fake” data point for the following three reasons:

1. Company-specific technology, not capacity, buy. INTC stated that 2009 CAPEX will be used primarily for its migration to the 32nm node to increase its performance lead vs AMD and lower production costs. The funds are earmarked for “technology buys,” not “capacity buys.”
2. Sharply declining utilization rates. Management stated on the conference call that factory utilization is coming down “dramatically” in Q1, and isn’t expected to return to normal levels until the second half at the earliest. Thus there will be no capacity buys any time soon.
3. CAPEX may be cut from these levels. INTC was asked on the call if its CAPEX plans could be more “conservative.” Management responded that the non-32nm component of the budget could be cut based on demand. There is nothing in the supply chain suggesting a demand uptick any time soon.

Thus we believe INTC’s CAPEX guidance is company-specific, and not indicative of semiconductor spending in general. Rumors are in the market that leading CAPEX spender Samsung (SSDIF.PK) could cut its budget in half, and TSM has already indicated that its 2009 CAPEX could be down -20% Y/Y. We remain negative on AEIS, AMAT, ASML, KLAC, LRCX, MKSI, NVLS, and other semi equipment names. For more information, see our BizMaps at www.connexiti.com.

Comments

[donzelion]

I've been buying chunks of Intel on the dips, mostly since their dividend seems about as safe as anyone's (granted, with profits down 90%, that's not particularly safe), and I like their long-term dominance potential (seems like a pretty wide moat to me, unless folks fall asleep at the wheel for five or six years...)

I would expect semis to outperform other market sectors when the turnaround comes, but Intel in particular seems like a sound bet, and rewards while waiting. But are you expecting a major move down to the single digits?

2009 Jan 19 11:38 AM

[Richard Davenport]

We don't set price specific price targets. Agreed that INTC's dividend is relatively safe, and they could always reign in their CAPEX spending a bit if they needed to.

There could yet be downside to INTC, however. Street Y/Y rev ests currently call for a decline of just -19.01%. I say "just" because our best-case scenario for Y/Y revs in 2009 for semis at large is -23%, and this estimate increasingly looks like it has downside. You might find our note on this topic interesting: seekingalpha.com/artic...

2009 Jan 20 09:26 PM