Uncle John's Cabin

Short and Long Term INTEL-ligence

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Earnings are due from Intel in a few hours. Here's my take before they are released. (Disclosure - I own (INTC) in my personal portfolios for a long term investment.)

Basic Premise - Intel has great PC chips, chipsets and motherboards as well as great market share and penetration. They also have a very large overseas operation. Their biggest rival (AMD) is falling flat on their faces, especially after buying graphics chip maker ATI which they have yet to successfully realized any significant synergies. Intel is also heavily invested in flash memory chips. NAND chips are used for MP3 players, cell phones and very soon, solid state hard drives in quantity. To date, these chip prices have been very volatile and has been a drag on Intel's earnings. Times may change though if the solid state hard drive replace the disk based hard drives in the next few years. The use of these chips for this application will be exponentially larger. (The Mac AirBook has the option for one but it is still very expensive.) The NOR chip business on the other hand has been divested with a joint venture with STmicroelectronics which has been a tough business to compete in. Other marginal investments include other chips like Adam for low power, low cost mobile computing which may or may not be a hit as well as Wi-Max for bringing the internet over cell frequencies, again, yet to be determined on whether it becomes widespread or not.

Short Term - It's all about the margins and the comments. Intel's albatross has been it's vicious war with AMD with price cutting and killing it's profit margins for years. Add to that the glut and falling prices of flash memory and you get a picture that has a very dominant company that is very profitable, a veritable cash machine, and yet, struggles to keep margins high enough to make investors happy. Intel recently re-announced a cut in the expected margins this quarter from about 58% down to 54%.

Intel will also be looked at as an indicator of the economy as a whole. Slowing corporate and personal sales rates will hurt. This will most likely be taken to be an indicator on the economy as a whole. Bad news = bad index performance.

Like Cisco, if they open their mouths about the trend in the economy for the next 2 quarters, it will be bad news. Period. Cicsco did this twice and got hammered each time in the last 2 quarters dragging most of the rest of the tech sector with it. Intel will most likely do the same.

Here's the prediction - Intel will meet or slightly beat revenue numbers but will struggle with margins and will be lucky to meet its lowered 54% projection. Inventories may also be high. This is a highly cyclical business and the spring is not a good time for them. There is very little chance they will say anything good about the next quarter and the markets will react badly, taking tech down most but also affecting the S&P in general to the downside. Corporate purchasing does not typically occur at this time of year for high tech as they are currently doubtful about the rest of the year and saving their budgets at this time to see what happens in the 2nd and 3rd quarters for them.

Long(er) Term - Intel owns the market for PC and now Macs. As the economy recovers, it will sell lots of chips of all kinds. Their best new products are the low power fast laptop chips with desktop machines on the decline and laptop sales of all kinds on the rise. (Jobs was quoted as saying he could not make the AirBook without them.) As they increase production and drop in price, this will work well for Intel in the long run. I am perfectly happy to own this for my IRAs as is and may cost average down after earnings when the price drops. This is a 3-5 year play. A shorter play will be to buy after earnings, cheap, or even wait until early summer, June-ish to buy (INTC) and wait for the cycle to turn in the fall and winter when Intel typically does its best.

To this end, I have taken a large ultra short position on the NASDAQ using (QID) before earnings as well as increasing my shorts on the DJI (DXD) and the S&P 500 (SDS). I expect the markets to react badly this week on tech in general and the markets as a whole due to comments from Intel. My plan is to only hold (QID) for a week or two as other high tech companies will report as well and I don't expect good things from them either. I do this in the context of a 6 month game. For my real, long term positions, I will consider buying after earnings to cost average down or possibly wait until summer depending on how far Intel drops.

Even marginally good news will not help this company's earnings season. Be warned!

I guess we will see how close I am to being correct in the next few hours.

Good luck as always,
Uncle John

P.S. Please keep in mind, Uncle John's Intelligence is an oxymoron, like government intelligence, so take this with a grain of salt and don't rock the cradle for a longer term investment here. I hold this stock and love it despite it's seasonal performance because there is virtually no competition. The biggest problems are the high R&D costs which make margins so important and the commoditizing of parts of it's business like the NAND flash chip business. I'm looking for a great opportunity to cost average down either this week or somtime within the next 3 months.