On Wednesday, September 26, analysts at Caris & Co. downgraded shares of Intel Corporation (INTC). The firm lowered its rating on the stock from a Buy to an Above Average and set a $26/share price target. Why did Caris downgrade the stock? It was noted on Seeking Alpha, earlier in the day that "Weak PC growth is the firm's unsurprising reason. Intel is off just slightly premarket - following the stock's selloff and plenty of other critical analyst reports, not to mention Intel's warning, the Street is taking Caris' move in stride."
As a result of the downgrade, shares of INTC reacted quite positively (contrary to popular belief), trading up as much 0.49% at the close of trading on Wednesday. Given the intraday performance of the stock I wanted to examine the company a bit closer and take a look at how it compares to some of its sector-based competitors in terms of profit margin performance over the last 12 months.
Comparative Profit Margin Analysis
As a whole and in my opinion, the Tech sector, possess some of the most diverse profit margins I've seen from a sector by sector standpoint. That said I wanted to demonstrate the fact that although Intel Corp. was downgraded today on concerns of a slowing global PC market, the company has demonstrated a very respectable profit margin over the last 12 months.
Intel Corp has demonstrated a profit margin of 22.73% over the last 12 months, which has successfully outpaced both International Business Machines (IBM) and Advanced Micro Devices, Inc. (AMD). During that period, IBM had demonstrated a profit margin of 15.34%, and AMD had demonstrated a negative profit margin of -9.92%, both of which were outpaced by ratios of 1.48 to 1 and 3.29 to 1.
Will the slowdown in the PC sector negatively affect the growth of each of these companies from a profit margin standpoint? The answer is clearly a "yes." Most investors would agree that there is a clear and present danger affecting the traditional existence of the PC user market as we know it, but that doesn't mean the PC market or better yet a market in which these three companies can strive doesn't exist. The individual consumer isn't the only buyer of Intel, IBM or even AMD-based chipsets and processors. For example, there are many purchases of Intel, IBM and AMD-based chipsets and processors within the commercial and cloud based market segments, and considering that cloud computing is one of the latest and greatest innovations, these three companies have the ability to sustain and even improve on current profit margin levels by simply tweaking their focus and market segmentation.
Potential investors looking to establish a position in INTC, AMD or IBM should proceed with a nominal amount of caution as a slowing global PC market continues to be the main concern of many analysts with regard to each of these companies. It was recently noted by a staff writer at Business Tech that, "The worldwide PC market is now expected to grow just 0.9% in 2012 as mid-year shipments slow, according to the International Data Corporation. The research group's Worldwide Quarterly PC Tracker finds that 367 million PCs will ship into the market this year, up just a fraction of a percent from 2011 and marking the second consecutive year of growth below 2%".
With smaller and more compact tablets and mini-laptops hitting the market, chip makers will need to develop a better retail oriented strategy if they intend on capitalizing on the individual PC user. If the global PC sector is continues demonstrate such dismal numbers the profit margins of all three companies will also decrease on an annual basis.
Disclosure: I am long INTC.