Intel Questions, Check Point Answers, GE Misses

This evening will see Intel Corporation (INTC) unveil its results after the bell, and Goldman Sachs expects these to be published amid much fanfare over the company's Flash business. As this column has already noted, Intel recently got rid of one problem in the form of the NOR flash business that had caused it substantial losses over the past decade, including its fab at Kiryat Gat, but replaced it with another, NAND flash, which the firm has already warned will shave 2% off its total gross profit for the first quarter.

Much has been written about Intel's unflattering foray into Flash, but I found an interesting approach to this in an entry about SanDisk Corporation (SNDK) on the blog of investor Mark Savolainen, by Amir Baan, one of the founders of msystems that had close ties with Intel when it first started out. Baan describes Intel's entry into NAND as a colossal failure, which did not get the attention it deserved. "Intel has a well-known philosophy of always being number one in the markets it enters, and staying away from markets that are commodities, and here it is struggling to hold on to fifth position in market which is increasingly becoming a commodity by the day," says Baan.

In an update published yesterday, Goldman Sachs writes that Intel's first quarter results in its processor business were fair, thanks to its strong position in the laptop business in emerging markets, and it expects this to be maintained in the second quarter. As for NAND, it expects Intel's profitability on this to continue to suffer from it for the rest of the year, and it believes the company will eventually abandon this field by the year end or 2009 at the latest.

Goldman Sachs believes that if Intel management has the presence of mind to present a reasonable road map for the exit from NAND when it holds its conference call today, investors will give its share a lift and overlook the losses it will continue to make on NAND until it finally exits it.

Whatever Intel management says about its NAND business in its conference call later today will have an immediate impact on SanDisk and the guidance it itself will be issuing on Thursday after the bell. For SanDisk, the ideal scenario would be for Intel to quit the field since the oversupply last year sent chip prices crashing and harmed profit margins across the entire sector.

Flash prices have been on the rise again since the beginning of the month, as a result, among other things, of the announcements by Micron Technology (MU), and Korean manufacturer Hynix Semiconductor [KSX:00660] that they would be shutting down old production lines and postponing the launch of new ones.

The Intel/Micron partnership, as everyone knows, does not pay SanDisk royalties, despite making extensive use of its patents, so Intel's exit from NAND will not harm SanDisk's revenue from royalties. Intel claims it has an agreement with SanDisk for reciprocal use of all of the two companies' patents, while SanDisk insists that agreement does not apply to Micron, but it has not chosen not to seek legal redress over this for the time being, which could, perhaps, be taken as a hint that the two companies are holding secret talks.

The last occasion I can recall where one side preferred not enforce to its patent rights in court, was when SanDisk allegedly violated msystems' patents on its Disk-on-Key [DOK] technology, and I couldn't get any clear answers from either of the two companies. It later emerged that the two had been holding secret talks which culminated initially in a collaboration on a DOK project then called U3, and then the acquisition of msystems by SanDisk.

Check Point (CHKP) will be one of the first Israeli companies to report before the start of trading on Thursday. For its share price to move north, the company will not only have to meet the market's expectations in its results and guidance, but also dispense with the somewhat harsh "Sell" recommendation from Goldman Sachs that has been weighing it down since the beginning of 2007. Goldman Sachs analyst Sarah Friar expects Check Point's report and guidance to be within the range of market expectations and gives as her reason for the "Sell" rating, the company's single-digit growth rate year-on-year.

Friar points out that Check Point has been posting single digit growth in recent years, despite an increase to double digit figures in recent quarters following the acquisition of Protect Data. With almost a year having passed since the acquisition, Friar believes that the company's annualized growth rate compared with the same period a year ago is set to slip back to single digits, and with no sign of any marked organic growth, she is sticking to her negative rating and low target price of $23.50.

Friar is equally unsympathetic about Check Point in her first quarter estimates for the company, which are below the market's average - $178 million sales as opposed to $187 million, and earnings per share at $0.38, instead of $0.40. She notes the upcoming appointment of Tal Payne as the company's new CFO in place of Eyal Desheh who is moving to Teva (TEVA), and hopes this will herald a change in Check Point's capital structure, but offers little by way of explanation, aside from the commonly known fact that the company has $1.2 billion in cash, one fifth of its market cap. Check Point, it will be recalled, recently announced $400 million share buyback program with no time limits.

Misses at GE

Never before have so many analysts been caught unawares as the number who failed to anticipate the shock news from General Electric Co. (GE) earlier this week. Everyone had warnings about the financial and consumer sectors, some also had some cautionary words to say about the technology, health, commodities, and energy sectors, but I do not know of a single analyst who warned of so monumental a surprise from General Electric, the world's largest conglomerate which operates in almost all the aforementioned fields.

Citi were the only ones that came close, since the bank's chief US market strategist Tobias Levkovitch, has for some time been advising investors to stay away from industrial stocks, as GDP continues to fall, but it never occurred to his fellow analysts who cover specific stocks that General Electric could also be swept along in the downturn, if Lefkovitch was proved right.

General Electric hasn't missed for decades and was perceived as immune due to the extensive geographical and sectorial diversification of its business, so the shock last week was profound. General Electric's share collapsed 13% on Friday, a fall which was second only to the general slump on the markets on October 19, 1987, when General Electric slid 18% but corrected by the same amount two days later.

Despite the shock results from General Electric, indices have remained in positive territory since the beginning of the second quarter, although the negative returns since the beginning of the year are substantial - 13.7% on Nasdaq, and half of that on the Dow Jones. We will be a lot wiser by the end of this week as to the direction the market is headed in, and the state of the business of companies, large and small and from all sectors, since many of them will be publishing their results and updated guidance.

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.