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Bill Maurer
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I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have... More
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  • Intel: Analyzing The 2016 Forecast

    Last week, I previewed some key items that investors needed to focus on for chip giant Intel (NASDAQ:INTC) in 2016. This was in anticipation of the company's Investor Meeting, which was held on Thursday. Intel management announced a solid dividend raise, while giving some preliminary color on the business for 2016. Today, I'll break down what Intel said and what investors should do next.

    For those that did not read the full release, here are the key points for 2016 that management detailed:

    • Revenue: Growth in the mid-single digits.
    • Gross margin percentage: 62 percent, plus or minus a couple points
    • R&D plus MG&A spending: Spending as a percent of revenue is expected to be down half a point.
    • Capital spending: $10 billion, plus or minus $500 million (includes approximately $1.5 billion for Memory)
    • Dividend: $1.04 per-share on an annual basis, an eight-cent increase year-over-year, beginning with the dividend that will be declared in the first quarter of 2016.

    Going into Thursday, analysts were calling for 4.0% revenue growth in 2016, with some of this increase coming thanks to the Altera (NASDAQ:ALTR) acquisition. Intel's guidance is basically in-line with expectations when you consider that the company will have a 53rd week in its fiscal year. At the current pace, an average week for Intel is a little over $1 billion in revenues, so mid-single digit growth doesn't exactly come in as earth shattering news.

    In terms of gross margins, Intel was at 62.04% for the first nine months of 2015, and guided to 62.00% as a midpoint for Q4. Thus, the company is basically saying that gross margins will be flat next year. It is nice to see that R&D plus MG&A spending, Intel's two primary operating expenses, are going to come down a little in relation to revenues. However, Intel did not provide any guidance for restructuring or amortization expenses. The company has had over $1 billion in these other two operating expenses over the past 7 quarters, and you figure there will be more restructuring charges taken with the Altera integration. Thus, I don't know if all 50 basis points of that guided improvement will be seen by the time we get to operating income.

    There are other items we didn't get in guidance, including a tax rate as well as "other income", which mostly involves interest income, interest expense, as well as equity investment gains and losses. While these numbers aren't as important as other income statement items, they can easily impact EPS by a few pennies here and there depending on which way they swing. When I run a couple of numbers, I get a general range of $2.25 to $2.45 for EPS next year for Intel, which is in-line with analyst estimates for $2.35. Yes, that is a wide range, but it is hard to forecast things precisely when we are missing some key numbers involved in the income statement.

    Intel management had already detailed that capex would rise in 2016 because this year saw an usually low amount of capital spending. The $10 billion forecast basically matches what we saw in 2014, according to the company's 10-K filing for that year. Between the increased capex, the dividend raise, and the debt taken on to acquire Altera, I don't think we'll see a meaningful buyback next year. We may see a few hundred million in share repurchases here and there, but I doubt we'll see a tremendous buyback. This is important, because Intel's share count could actually rise without a major buyback, negatively impacting EPS by a few pennies.

    In terms of the dividend raise, it was the best we've seen from Intel in a number of years. Based on early afternoon Thursday trading, it puts the company's yield back above 3.00% on an annual basis. However, investors looking purely for income in this space should consider peer Qualcomm (NASDAQ:QCOM), which saw its yield top 4.00% on Wednesday. In this low rate environment, an extra roughly 100 basis points of yield is a tremendous amount. Qualcomm is also buying back plenty of stock right now.

    Intel shares were up almost 4.00% on Thursday afternoon when I submitted this article. As seen in the chart below, they have pushed towards the upper end of their recent range, a couple of dollars above their 50-day moving average. The best time to buy this stock has been when it is below that key technical level, so in that respect it is not time to buy. Don't forget, Intel jumped last year from $34.35 to $35.95 on the day of it's Investor Meeting, topping out about two bucks higher than that in early December. That process could easily repeat itself a year later.

    (click to enlarge)

    (Source: Yahoo! Finance)

    In the end, I would call Intel shares a hold. I would not encourage investors to rush in and buy at the moment. The 2016 forecast was mostly in-line with expectations, especially when you consider the added benefits of an extra week in the year. While the dividend raise is nice, there are higher income options out there, and I don't see much of a buyback from Intel in the short-term. The PC industry is still weak, and Intel is still trying to play catch up in the mobile arena. Current investors should be satisfied with the 2016 forecast, but I don't think it makes Intel a strong buy at nearly $35 a share.

    Nov 19 2:42 PM | Link | Comment!
  • Rising Rates Won't Kill Apple's Buyback Anytime Soon

    When it comes to Apple's (NASDAQ:AAPL) tremendous buyback plan, there's been a growing fear lately over the rise in US interest rates. As you can see in the chart below, the US 10-year rate has risen in recent weeks as the market believes the Federal Reserve will hike rates at its December meeting. Fortunately for investors, Apple's cash situation remains in good shape, so I don't think there should be any buyback fears in the near term.

    (click to enlarge)

    (Source: Yahoo! Finance)

    A majority of the cash Apple generates is outside the US, and the company to this point has not been willing to repatriate these funds and pay a large tax bill. As a result, management decided a few years ago that it would start taking on debt to facilitate the repurchase of Apple shares. Over the past couple of years, Apple has been very active in the global debt markets, raising almost $65 billion through commercial paper and long-term debt. As you can see from the chart below, however, Apple's debt pile at the end of its most recent quarter (and fiscal year end) is still just a fraction of its total cash and investments balance (the "cash pile").

    (Source: Apple 10-K filings)

    Apple only had about $18.8 billion in cash within the United States at the end of its September quarter, but I really don't think investors need to worry just yet. As you will see in the next chart, the company only has $6 billion worth of debt maturing by the end of 2017, which it could easily pay back now if it wanted to. I'm guessing that Apple will refinance these debts, and even if it pays a little more in interest, the added costs shouldn't be much more than a rounding error on the income statement.

    (Source: Page 59 of Apple's 2015 10-K filing)

    In fact, rising rates might actually benefit Apple in the short-term. During fiscal 2015, the company earned roughly 1.49% on its cash and investments, up from 1.11% the year before and 1.03% in fiscal 2013. As a result, the company recorded interest and dividend income of nearly $3 billion for the fiscal period, up more than $1.1 billion over the prior year. As seen below, Apple's interest income is about four times its interest expenses currently.

    (click to enlarge)

    (Source: Page 29 of above linked 2015 10-K filing)

    At the end of fiscal Q4, Apple had $36 billion remaining on its $140 billion buyback program, expected to be utilized by March 2017. That leaves an average of $6 billion per quarter for share repurchases over the next six fiscal quarters. Prior to the fourth fiscal quarter of 2015, when Apple bought over $14 billion worth of shares as they pulled back, the company had averaged about $5.7 billion in open market purchases over the prior seven quarters. That average did not include any of Apple's accelerated share repurchases.

    During fiscal 2015, Apple paid out more than $11.5 billion in dividends and bought back over $35 billion in stock, while taking on less than $30 billion in total debt. Since total dividend payments probably won't rise more than a billion dollars in fiscal 2016, Apple should still be able to buy back some shares without adding any debt or repatriating foreign funds. However, the company will likely add more debt to kept the buyback running at the above mentioned pace.

    Even in a worst case scenario, are rates going to rise more than say 50 basis points in the next few months? Back in May, Apple's debt offering included a 10-year bond with a 3.20% coupon. Given Apple's rising total debt amount and that 50 bps jump, a similar offering in the future probably would have a coupon of 4.00% maximum. The tax benefit of that debt probably slices a percentage point or so of that off, and Apple is buying back shares that currently yield 1.83%, so there's a cash flow savings there. When you add in the increased interest income Apple is getting on its cash and investments, the cost to add debt is extremely minimal. Thus, I don't think investors need to worry about a small rise in interest rates hurting Apple's buyback anytime soon, part of the reason why I believe 2016 will be the company's biggest year.

    Nov 18 10:36 AM | Link | Comment!
  • Will Investors Follow Elon Musk Into SolarCity?

    One of the worst performing stocks recently is SolarCity (NASDAQ:SCTY), which has lost about half of its value over the past three months. On Tuesday, we received word that Tesla (NASDAQ:TSLA) CEO Elon Musk added to his massive stake in SolarCity, a company founded by Elon's cousins. With shares in the solar name close to their 52-week low, it will be interesting to see if this purchase helps mark a bottom.

    Over the last couple of trading days, Musk bought over half a million shares of SolarCity, for a total cost of about $13 million. We haven't seen much of a reaction yet to this purchase, which unfortunately for Elon is his best buy of the past few months. As we can see from an insider transaction history, Elon's August purchase of SolarCity was at more than $40 a share. Those shares have lost more than a third of their value, while his $20 million buy of Tesla shares in August is also underwater by more than 11%.

    Like Tesla, SolarCity has had a hard time meeting expectations. At its most recent earnings report, SolarCity cut its installation guidance for 2015, and stated it was scaling back on growth plans for 2016. This is a similar situation to Tesla, which has cut its delivery forecast for this year. As you can see in the charts below, both names have seen dramatic drops in their bottom line estimates for this year.

    (click to enlarge)

    (Left chart - Tesla estimates, right chart - SolarCity estimates)

    Like Tesla, SolarCity is also burning through cash at an alarming rate, more than half a billion dollars from operations during the first nine months of 2015. SolarCity management wants to achieve positive cash flow by the end of 2016, but that remains to be seen. Recently, the company has taken out another few rounds of solar bonds, as seen on its filings page. What worries me most is that if equity must be raised, SolarCity is a much smaller company than Tesla. SolarCity has a market cap of about $2.5 billion, less than 1/10th the $28 billion value of Tesla. Raising say half a billion dollars would result in tremendous dilution for SolarCity, but would be a drop in the bucket for Tesla.

    It remains to be seen how Elon Musk's latest purchase of SolarCity shares will do, but his 2015 buys so far have been sizable losers. At this point, I will not be following Elon into SolarCity, as the company's losses continue to expand and now installation growth is being scaled back tremendously. Investors are not following Elon into SolarCity in droves just yet, as shares finished Tuesday down almost 7%.

    Nov 18 9:56 AM | Link | Comment!
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