I don't completely call out companies very often. However, I will call a company when necessary, and today, that is the case with chip giant Intel (INTC). After what looked like a great investor day presentation, which sent shares higher by 2.7% to the highest point in almost 6 months, the company made a stunning announcement. Today, I'm going to call out Intel for destroying investor hopes again. Intel's latest warning is the joke that isn't funny anymore. The sad part is that this process keeps repeating, with no end in sight.
Intel's 2014 guidance / warning:
So after all of the positive foundry news and CEO's promise to quadruple tablet shipment CPUs in 2014, management decided to give exceptionally poor guidance. Intel stated that 2014 revenues would be flat, compared to 2013 revenues. This is just the latest in a series of revenue disappointments for Intel, and is making the company look like the worst large cap technology name.
I'm not exaggerating that last point either. After originally guiding to high single digit revenue growth in 2012, Intel produced a decline in 2012 revenues. The difference between the original guidance and actual amount turned out to be more than $4 billion in revenues. The hope was that Intel would then return to growth in 2013, with a bounce back that would produce a new yearly revenue record for the company.
Well, when Intel gave its original guidance for 2013 (low single digit growth), analysts were expecting $54.35 billion in revenues, almost 2% growth. That forecast turned out to be extremely optimistic again, and current estimates call for $52.60 billion, or an additional 1.4% decline after 2012's decline. Since Intel's original guidance for 2013, analyst estimates have dropped by $1.75 billion on the revenue front. Earnings per share estimates have also declined by a nickel. I was a bit concerned when Intel reported Q3 as the company's Q4 guidance was a bit below estimates, the weakest guidance the company had provided in more than a year. I didn't know this would be the start of an even bigger disappointment, but that's Intel for you.
So with 2013 expected to be another down year, that meant that everyone was looking forward to 2014. I said that Intel was now on the clock, and part of that included providing a decent 2014 revenue forecast. Well, that didn't happen. Going into Thursday, analysts were looking for 2.1% revenue growth in 2014, or dollar growth of $1.13 billion. With Intel now guiding for flat revenues, revenue estimates are now going to have to come down by a billion dollars. Rinse, wash, repeat. This is the latest estimate takedown for Intel, and I would be surprised if it is the last.
The funny part is that Intel estimates for 2014 had already come down significantly. The fact that Intel is now warning makes the situation look even worse. Here's a brief history of Intel's 2014 estimates, with the last number going into Thursday.
*Growth numbers for 2014 are based on the 2013 estimate at that point. As the 2013 numbers have changed, that will impact the growth number for 2014 estimates at the same revenue/earnings level.
Since the middle of April, when Intel reported Q1 results, analysts had reduced their 2014 estimates by more than $2.4 billion for revenues and 13 cents for earnings per share. Now, revenue estimates have to come down by another billion, and I'm guessing you'll probably see earnings estimates down by a nickel or so. Be prepared to see an update to this table in a couple of weeks, and it will not be pretty.
Maybe we should forget the dividend raise completely:
Normally I'm not that negative, but in Intel's case, the company has not done much to prove me wrong. Just a few days ago, I came out and lowered my dividend raise prediction. I just felt that disappointing results and a somewhat cash tight balance sheet might force the company to not raise the dividend as much as I originally thought. I also thought that Intel would be better off if it bought back more stock instead of increasing the dividend more. The reasoning was simple, as I like many were expecting a 2014 rebound in revenues.
Now that the company has basically guided down revenues by a billion, I wouldn't be surprised if the dividend is not raised. Intel investors were worried when the company did not raise the dividend earlier this year, but I don't know if Intel can increase it now. Net income has plunged in the past two years, and that will eventually pressure cash flow (some working capital items have offset that for now). I'm sure that Intel will also need to have a large capex plan, which won't leave too much extra room for an increased dividend or larger buyback. Remember, the buyback has already slowed down tremendously in 2013.
Looking at Intel as a top tier tech? Not anymore:
If Intel wants to be a top tier tech company and investment, it really needs to start acting like one. It now seems that 2014 will be the third disappointing year in a row. I don't know of another big name like this that has disappointed to this extent. The Dow Jones and S&P 500 are racing to new highs, and Intel shares, while elevated, have continued to disappoint. For those that have read my recent tech sector articles, you know I've used a 2014 comparison table. The table compares Intel, Apple (AAPL), Microsoft (MSFT), Cisco Systems (CSCO), and Google (GOOG). Here is how the table looked, with expectations as of Thursday, and Thursday's closing prices. This is before Intel's guidance warning and after-hours decline.
Cisco became the worst growth name here after its huge warning. In my dividend raise reduction article above, I said that Cisco's warning did not make Intel look better, it made Intel look less bad. Well, Intel just backed up my statement, and now Intel is going to look bad. Any growth that investors were hoping for is gone. Additionally, of the four dividend paying names, Intel traded at the second highest valuation. I thought that was a joke to begin with because of the two yearly disappointments. However, I said investors were bidding up shares ahead of a potential 2014 rebound. Intel was trading at a 10% premium to Apple as of Thursday's close. I don't see how that remains now. The funny part is that Cisco dropped 11% on its bad report. Microsoft dropped a similar amount earlier this year on a disappointment. Apple plunged from $705 to $385 on a couple of disappointments, but Apple was still showing plenty of revenue growth. Yet, Intel has continuously disappointed and it was less than a dollar from its 52-week high on Thursday. The question is how much will Intel drop. In the after-hours, shares only lost 1.3%, but I think that is just the tip of the iceberg. We're headed for some serious analyst downgrades.
Did something happen in the last month?
I think that Intel management failed its shareholders with Thursday's events. When we had the Q3 report a month or so ago, did management already know 2014 was going to be this bad? If they did, why not warn investors then about a sluggish 2014? Then, a bad year would have already been priced in, and the investor day could have been a completely positive day. Now, the day looks like a complete failure, as the warning erased a ton of positive energy garnered by the event. Did something happen in the last month to change the outlook, or did the company just wait until now to provide a 2014 forecast?
After such a great investor presentation that had shares up 3% at Thursday's high, Intel warned that revenues would be flat in 2014, after two years of revenue declines. All the hope and promise of a rebound next year are gone for now, and in theory that should have serious consequences for the stock. Intel had rallied on a 2014 rebound, and that's not happening, so this might be a good short candidate. It might also cause the dividend to stay stagnant for another year, and the buyback to be reduced further if Intel needs to spend the money for capex. I warned investors that Intel was pushing up against some technical resistance, and that a pullback would soon come. I just didn't think it would be in a day or two and that it would be due to a huge revenue warning. Intel has again disappointed, and the joke is no longer funny. After Thursday's events, Intel investors should demand a refund.
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