Regarding Intel's Quarterly Results & Investment Strategy

Intel's earnings report after the market's close on Tuesday evidently surprised analysts. As I write this before Wednesday's market open, the firm's equity price has risen some 7% in after-hours trading.

Intel CEO Paul Otellini hurried onto CNBC's morning program to stump for his firm and its future prospects. No real surprise there.

Way back in 1997, when I bought my first live portfolio based upon my equity strategy, Intel was one of the selections. That was the only time it was a holding.

The first chart compares Intel's equity price to the S&P500 Index's for the past five years. For all the risk you'd assume in holding the single issue, Intel, you would have had a return virtually identical to that of the broadly-diversified index.

But what about Intel's fundamental performance? After all, Otellini was crowing about their revenue growth.

So I reviewed the firm's relative revenue growth for the past five years from the analysis my quantitative selection process performs each month. As I expected, on a multi-year basis, Intel's revenue growth rates have been either inconsistent, or below-average during the past several years. It's never been above-average on anything approaching a long term basis.

This means that, to capture gains in Intel's share price, which are inconsistent, you have to be a market-timer. That's a very risky strategy, as most professional investors will tell you.

If, instead, you prefer to hold Intel for the long term, well, look at the second chart comparing it's price with the S&P500 since the mid-1980s. Even as a meteoric growth issue back in the early years of the timeframe, it was not a smoothly-rising curve. Then the late-1990s technology sector bubble broke the back of the stock's growth character.

Despite what some pundit on CNBC blustered about Intel having revenue growth that now makes it, well, a growth stock....it's not. A quarter here, a quarter there...does not a growth issue make.

Has Intel suddenly recaptured the magic of its old, 30 years ago self? Doubtful. Last time I checked, they hadn't entered a radically new business. Yes, they bought McAfee. But it's not like they've suddenly entered online social networking or online couponing. Neither of which would probably help them at this point.

No, I think all we're seeing is an unexpectedly strong quarter of revenue growth for Intel. If anything, its being unexpected is probably a greater testament to shoddy sell-side analysis than anything else.

But unless you believe Intel has magically entered a new era with its same old business mix, you'd probably be better-advised to observe the equity's performance from the sidelines, rather than risk your own capital on the rollercoaster that is Intel's equity over time.

Intel's Bid For McAfee

Intel made a big splash with its offer yesterday for McAfee, the computer security/anti-virus firm.

The $7.7B deal merited two separate articles in this morning's Wall Street Journal Marketplace section, as well as the lead front-page story.


The Journal reports that the deal sports a 60% premium to McAfee's stock price. And it's Intel's largest acquisition ever.


Let's review the usual checklist governing the advisability of an acquisition like this.

First, the odds of such a combination working, knowing nothing more about the acquisition than that it is occurring, is, I believe, no more than 1 in 5.


Second, Intel is in a rather special business, with a unique culture. I've known a long-time, retired Intel multi-millionairess in the past, and her stories conveyed a most unusual business culture. It would be very surprising to me if the 'Intel way' worked with or at McAfee.


Between semiconductor boom and bust periods, heavy investment requirements, and sprawling manufacturing and design centers, Intel's core business has very different dynamics and attributes than I expect does McAfee's.


Then there's my favorite aspect of critiquing such a deal: what does owning the target provide the new owner that a close marketing or joint venture tie-up would not? This is especially relevant for firms which serve a common product/market, but aren't actually in the same product/market themselves. In this case, the intersecting product market is the personal computer/digital device. But what Intel and McAfee do is so different.


For example, consumers and, for that matter, corporate buyers, don't actually choose Intel. It's an embedded component of a larger device. But end users do often choose between McAfee and Symantec. So the focus of the two companies is very different in terms of serving users who may, or may not, choose their product.


Why couldn't Intel dedicate a business unit to working closely with McAfee, which could do the same, in order to technically knit their products and service together as closely as if they were the same firm? Even perhaps, if justified, mutually capitalize a separate entity to contract with each firm to design, manufacture and market separate, integrated products using the two parent firms' technologies?



It's one thing for Intel to allocate capital to such an effort, or just building a "McAfee Inside" line of chips. It's quite a different matter for Intel to allocate $7.7B to buy and then be responsible for managing a firm which is in a very different product space than is Intel. And managing it to achieve consistently superior total returns.


One Journal article reports,

" 'Is there a lot of downside' Probably not,' a Wall Street analyst said of the deal. 'But is there enough upside to justify the premium?' "


Just so. And a look at the nearby 5-year price chart for Intel, McAfee and the S&P500 Index shows that McAfee has been out-performing Intel and the Index for the past year, and over five years. Intel isn't even beating the Index.


So how's a firm that can't manage to be more attractive than the S&P500 going to continue McAfee's better-than-average performance? Is Paul Otellini going to suddenly become smarter in the area of anti-virus product management?


I don't think so. So there actually is some non-zero downside risk, if only because McAfee's operations could deteriorate, relatively, under Intel's new supervision.


Don't kid yourself. No operating firm spends $7.7B to keep its hands off its new toy. Maybe Warren Buffett or other portfolio investors do, but operating companies typically do not behave in that manner.

In contrast, I recently had a discussion with a retired senior oil industry executive. He pointed to the successful merger of his company and a competitor, which facilitated greater access to capital to develop the former's assets, while cutting costs. By all measures, the meger, now years old, has succeeded. But the cultures, businesses and operations were very similar, unlike the situation involving Intel and McAfee.


The Journal's in-depth piece on the deal cites Otellini as saying that McAfee will be run separately and that he's received commitments from the anti-virus firm's senior management to stay in place "for many years."


Intel shareholders should be worried about this, and this morning's drop in the firm's share price shows they well may be. It's a "damned if you do, damned if you don't" situation.


If Otellini tries to manage McAfee, he may ruin it. If he doesn't, why'd he pay a 60% premium?

See why joint ventures or very deep and close marketing relationships, in such circumstances, are less risky, but can deliver the same, or perhaps even more benefits, with less downside risk to shareholders?


Intel hasn't appeared in my equity strategy's portfolio for well over a decade. Its performance has mitigated against that. I don't think the McAfee deal will put it on a path back to consistently superior performance anytime soon.

AMD vs. Intel- Again

In May of 2006, I wrote this post on the then-resurgent AMD. Back in April of this year, I followed up with the shocking news that AMD had, in fact, screwed up its big opportunity.

As a backdrop, the nearby Yahoo-sourced price chart for AMD, Intel and the S&P500 Index display the story for the past five years.

AMD had actually peaked just before that 2006 piece, and has been steadily declining ever since.

Intel, true to my prediction, has never really risen to be a consistently superior total return performer again, like it was just over a decade ago. In fact, over the five years, the two both lost money for their shareholders, with AMD faring slightly worse.

Now, in a Wall Street Journal article earlier this week, AMD announced that Dirk Meyer, AMD's president and COO, will take over as CEO, too, from Hector Ruiz.

It's a sad tale of the second-rate firm nearly besting its perennial enemy, only to stumble when given a chance. Ruiz apparently lost focus, got the company over-extended, and missed important product delivery timelines.

Meyer sounds like the ticket to at least halt the bleeding at AMD. He is quoted as saying he will focus on execution and narrowing AMD's efforts to those product/markets in which they hold clear superiority over competition- read Intel.

On the other hand, some say he was a key player in the mistakes that led AMD to this point.

Honestly, either way, I don't think either chip maker would be on my equity/options selection lists anytime soon. The sector just seems too prone to erratic performance and an inability to overcome obstacles to delivering shareholders consistently superior returns.

AMD's Sagging Fortunes

How the world has changed in the semiconductor sector!

Just about two years ago, I wrote this post in observance of AMD's successful revenue and profit growth, while Intel struggled.

This morning, however, the Wall Street Journal published an article detailing AMD's recent woes, including a 10% cut in its workforce.

What went wrong?

Nearby is a Yahoo-sourced five-year price chart of AMD, Intel and the S&P500 Index. It seems that my post from May of two years ago, based upon another Journal article, from that time, caught AMD just past its stock price apogee.

Today's Journal article notes,

"The company has been coping with a series of problems, including a heavy debt load from its 2006 acquisition of ATI Technologies Inc. and a stronger line of competing products from Intel. AMD counterattacked in September by announcing a new line of chips that pack the equivalent of four electronic brains on a single piece of silicon.

In December, AMD disclosed technical defects that affect models of the chip for server systems and desktop PCs. It has now introduced versions without those bugs, but computer makers held up purchases in the meantime, said JoAnne Feeney, an analyst at FTN Midwest Securities Corp.

She added that demand has been softening for desktop PCs, a field where AMD has been the strongest lately. "They were gaining share in desktops, which paradoxically exposed them more" to the demand problem, Ms. Feeney said.

John Lau, an analyst at Jefferies & Co., estimated that the total PC market declined about 10% from the fourth period, with AMD's 15% drop also reflecting losses in market share."

So, putting the pieces together, it seems that AMD's acquisition of ATI, Intel's own counterstrikes, and then AMD's management troubles combined to push its stock price down ever since that brief window of triumph.

Since that brief, two-year period of outperformance of the index and Intel, AMD has had a pretty much monotonic decline, as depicted by the nearby Yahoo-sourced price chart for the past two years.

Even so, as the first chart clearly shows, AMD is still not tremendously far below Intel over the longer timeframe. After its rollercoaster ride up and down, AMD looks to have returned to the same overall neighborhood of performance that Intel has shown by its nearly-flat trajectory over the period.

Both have underperformed the index for five years, indicating why neither shows up on the list of equity selections for my portfolios.