Intel Can Split To Bring Out Value - Cramer's Mad Money (4/20/16)

by: SA Editor Mohit Manghnani


Diversification is the best defense against rotation.

Reviewing the banks.

Pulte Group feud.

Stocks discussed on the in-depth session of Jim Cramer's Mad Money Program, Wednesday, April 20.

Many still do not want to accept that things are getting better. This will only help the markets move higher in Cramer's opinion. The global economy is not as bad as many portray. Consider IBM (NYSE:IBM) which reported earnings that were not as bad as expected. It has a massive reach and it is tied to the recovery of the global economy.

Things are improving faster than expected. especially for oil. "I think the clock is ticking, and the deals are about to happen," said Cramer. The expectation going into the Doha meeting last weekend was that major world players will freeze crude oil production. Hedge fund managers thought this was ridiculous and shorted the oil and oil service stocks. When there was no deal, the oil futures broke down. "That was just plain wrong. Why? Because the Doha meeting and all the chatter about a production freeze never mattered. What matters is supply and demand," added Cramer.

One of the key drivers for demand in oil is China. Their drilling has yielded fewer oil barrels a day as their fields are played out. The demand for oil can increase in China. "I think China is coming back, so rather than finding this rally in oil puzzling and fighting it like so many hedge funds out there, I embrace it," said Cramer.

He will also not be surprised to see many deals in integrated oil companies especially for those that can make money with oil at $40. That is why the market showed interest in Baker Hughes (BHI) after the Halliburton (NYSE:HAL) deal broke.

When oil stocks rise, Cramer expects banks, agriculture, and commodity chemical stocks to accelerate as well. The effect of this move is that money is rotated out of safety stocks such as Coca-Cola (NYSE:KO), Pepsi (NYSE:PEP) and utilities that tend to do poorly in a rising interest rate environment. If one is wondering why Pepsi went down on Wednesday, the answer is nothing but rotation. "You are just being victimized by a breathless deep value rotation that many in the hedge fund world are fighting every step of the way," concluded Cramer.

The best defense against rotation is to be diversified.

The Banks

The earnings for 6 major banks are out already and Cramer sliced and diced each one to give his take on the banks. His conclusion was that the last quarter was not great for banks but it was not as bad as many feared.

The banks trade on 3 metrics - trading revenues, investment banking revenues and net interest margins. The interest margins were helped by the Fed's December rate hike but that was not enough to offset the losses in the other 2 areas.

JPMorgan Chase (NYSE:JPM) reported revenue and earnings beats with loan growth of 17%, higher net interest margin and cost cutting. Morgan Stanley (NYSE:MS), on the other hand, had the worst trading business in the group. The company has got very aggressive on cost cutting.

Citigroup (NYSE:C) also had lousy trading results but was helped by international exposure and less leverage to bad oil loans. Goldman Sachs (NYSE:GS) had one of the worst quarters with huge declines in investment banking revenues, financial advisory revenues and institutional client services revenue. The management has been focusing on cost cutting.

Bank of America (NYSE:BAC) saw decent loan growth, rise in net interest margins and core deposits compared to last year. They continue to cut costs which can be seen by the decline in non-interest expense. Their investments in technology makes them well positioned for the future.

Wells Fargo (NYSE:WFC) delivered an okay quarter with decent deposit growth and modest loan growth. One area of concern is $17.8B in energy loans. If oil goes higher, it will be good for the bank.

The valuations of all these banks are cheap with many trading under book value. "Any way you slice it, this was a rough quarter for the banks, but none of them denied it. They did not apologize and they did not make excuses," said Cramer. With improving investment banking divisions, Cramer expects the banks to rise higher.

Is Intel (NASDAQ:INTC) splitting?

Could Intel be on the verge of splitting itself into 2 - one the slowing PC business and the second the fast growing Internet of Things business? Cramer thinks this is a possibility after interviewing CEO Bryan Krzanich. Intel announced that CFO Stacy Smith would move to a new position to oversee sales and manufacturing.

When Cramer asked Krzanich if Stacy was moving to lead the slow growing PC business and Krzanich overseeing the fast growing business, "Bryan made me feel like I read his mind. And why not? I think the move would unlock tremendous value," said Cramer.

Krzanich cited the decline in PC business as a reason to lay off 12,000 employees so they can find money to expand faster moving segments of their business. "So, I put it out there, calling it a conspiracy theory but just venturing out why Stacy Smith would be moving around the company instead of staying CFO, perhaps being groomed to run a spun-off processor business," said Cramer.

There is one more reason to believe the company might split. Why did the stock move higher when the company reported a disappointing quarter. "I say if you own Intel, keep it. If you don't, consider it. Bryan is going to bring out the value and you don't want to miss it," said Cramer.

The break-up might not happen tomorrow, but with 3% yield investors are being paid to wait for unlocking value.

Pulte Group (NYSE:PHM)

The nation's third largest home-builder Pulte Group is in the midst of a huge feud over leadership. The company's founder William Pulte wants James Postl to resign from the board of directors. This comes after the request he made few weeks back for CEO Richard Dugas to step down.

The letter released by William Pulte on Wednesday said, "It is my conviction that Richard Dugas and James Postl must resign immediately from all their positions with the company." William also stated that if they refuse to resign, he will vote against the entire board in this year's shareholder meeting. Cramer interviewed Pulte's grandson and Pulte Capital Partners CEO Bill Pulte who said, "We believe that Jim and Richard are still really running the company, remember they hold chairman, CEO and lead director."

Pulte's letter stated that the failed deal with Centex cost the shareholders $1.46B. "We need someone on the board to work with them constructively. We will meet with them any time, unfortunately our calls haven't been answered," said Pulte. When Cramer asked Bill if he would want to be the CEO of Pulte Group, he said, "Absolutely not, no. Frankly, I'm not qualified to be the CEO of the company, but at the same time I can say that Mr. Dugas with all due respect, losing $500M doesn't qualify you to run this company."

The stock performance under Dugas was initially good with the stock tripling in just 2 years. The shares collapsed near the financial crisis and have not come back as other home-builders have. Bill thinks that there are better representatives on the board to run the company.

On April 11, a Pulte Group representative said, "We are disappointed that the Pultes continue to attempt to destabilize the company's leadership and derail our successful value creation strategy through their public statements. Their attacks bear little resemblance of the facts." Bill said that the company has been lagging behind its peers and it has to stop as it is not good for the board or the employees.

Viewer calls taken by Cramer

Silver: Cramer prefers gold over silver and advised having 10% of the portfolio in precious metals.

Columbia Pipeline (CPGX): Ring the register, book the profits and leave.

Staples (NASDAQ:SPLS): The delay in mergers is due to bureaucracy.

General Dynamics (NYSE:GD): It's got exposure to the private jet market and that's why Cramer has been recommending Lockheed Martin.

Square (NYSE:SQ): Book your profits. That is all it had.

Xerox (NYSE:XRX): The stock is worth buying and Cramer agrees with Piper Jaffray's call of the stock hitting $14.

Cisco (NASDAQ:CSCO): Cramer thinks the stock is positioned to go higher. It has great yield too.


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