In January 2008, I pondered the possibility of adding a tech company to my dividend income portfolio. It couldn't be just any tech company since most are quite volatile and don't produce sufficient cash to pay a consistent and rising dividend. Two tech companies that were worthy of consideration were Microsoft (MSFT) and Intel Corp (INTC) due to their ability to generate free cash flow. I considered INTC the stronger of the two and had high hopes, but things didn't initially work out. Eventually, patience prevailed and when INTC's price and interest rates dropped to the point the numbers made sense, I purchased it. So what's INTC's outlook now?
While flipping through some of the finance and IT free magazines that I get at work and came across an interesting article on INTC in the February 16, 2009 ComputerWorld magazine. The article, "Intel Looks to Pull Itself Out of Economic Hole", could be perceived as negative on the surface but after closer consideration offered me some assurance that INTC would prevail in the end.
The article described the horrendous fourth quarter that INTC endured where revenues fell 23% and profits 90%. In February INTC announced plans to close four manufacturing facilities in Malaysia, the Philippines and Silicon Valley that would reduce its workforce by 6,000 jobs. Things are so bad that INTC did not provide projections for the first quarter due to "economic uncertainty and limited visibility." Sounds bad, right?
The hope came from INTC's plans to invest $7 billion over the next two years upgrading U.S. factories in Arizona, Oregon and New Mexico so they can produce chips based on 32-nanometer (nm) technology and accelerate the shipments of it first 32nm chips into Q4/2009. Why is spending this much money during an economic downturn a good thing?
Forrester Research Inc. analyst Frank Gillett said not moving ahead with the 32nm plan could blunt the company's hard-earned technology edge over Advanced Micro Devices Inc. (AMD). This is the is the fundamental core of INTC's competitive strategy - use its huge cash flow to constantly push into manufacturing technologies that lower costs, making investments that can't be matched by competitors. Will this work?
Leslie Fiering pointed out that one of INTC's tremendous strength's is process control in manufacturing. Contrast that with AMD's strategy of spinning off all its manufacturing into a new joint venture and relinquishing some control over the manufacturing process. INTC is smart enough to play both sides of the fence. Its deal with Taiwan Semi will let INTC cut costs in making chips that rely on older manufacturing technology while putting its money into pushing the new manufacturing technologies where its future lies.
While most analysts are projecting significant drops in chip sales during 2009, INTC has the vision and ability to execute its long-term strategy. The road will not be smooth, but it in the end, my money is on Intel.
Full Disclosure: Long INTC
Additional Reference: 20 stocks worth watching
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Intel Corp (INTC): Staying The Coarse
Posted by D4L | Thursday, March 12, 2009 | commentary | 2 comments »________________________________________________________________
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Great review. Intel has always been a tech bellwether company, and they probably understand more than companies in other sectors the nature of cyclical economic cycles. Semiconductors are at the extreme end of the cyclical spectrum, the polar opposite of something like food or consumer staples. My amateur opinion believes that this experience gives their senior management alot more skill in dealing with downturns and managing upsides better than most companies out there today.
I have also been long Intel for some time now. When the economy does pick up, semiconductors generally take off, as companies that are expanding typically do so with big IT hardware investments.
Lightway: I originally owned and sold INTC before the tech bubble burst. I wish I had purchased it right after that.
Best Wishes,
D4L