Where Intel Has the Inside Track
Intel (INTC)
Jim: Today we look at the world’s biggest semiconductor maker. It has annual sales of $26 billion, is one of the most heavily traded Nasdaq stocks and is probably best known to our readers for its Pentium microprocessor chips for personal computers.
Mike: Some things have changed for Intel over the last year or so. In the old days, buying or selling Intel was basically a play on high-technology. If you thought computer sales and capital spending on technology were going up, Intel was a buy because it really had no competition, at least not in the general microprocessor industry.
Jim: It’s not that easy a call anymore.
Mike: That’s for sure, because now Intel does have competition, especially in the market for chips that run under-$1,000 PCs. There, rivals such as Advanced Micro Devices have come up with chips that are giving Intel fits.
Jim: Intel’s chip in that market is called Celeron.
Mike: Right. In fact, when Intel first came out with Celeron, it was--uncharacteristically--a bomb. It was a lousy chip, it was slower than its closest competitor and it resulted in a lot of dissatisfied customers, namely the “box makers” that build computers.
Jim: But Intel is trying to turn that around.
Mike: Yep. Its next incarnations of the Celeron chip have been great products, and have rewarded everybody’s faith that this company is an engineering juggernaut. In fact, Intel unveiled even newer versions of Celeron on Monday.
Jim: Another thing Intel has done is clearly segment its business, meaning it’s devoting chips to specific markets: Celeron for low-end PCs, Pentium for mid- to high-level PCs, and one called Pentium Xeon for even more powerful computers. It’s a strategy that enabled Intel to keep its overall price levels about even, and to scrape through what was generally a disastrous 1998 for the semiconductor industry.
Mike: That’s right. Now, the latest predictions coming out of the geniuses on Wall Street is that the industry’s long slump is about to end, or is ending even as we speak. People are looking at the chip industry growing 20% or more a year again. If you believe that, then you have to believe that Intel is a buy.
Jim: Which I do. Right now the stock trades for about $120 a share, after having jumped about 45% in just the last three months, when signs began surfacing about the chip industry’s rebound. It also helped that Intel began forecasting better numbers. It’s likely to show a 15% drop for 1998 earnings . . .
Mike: But that’s a big improvement over what people were expecting earlier last year.
Jim: Exactly. And another reason why Intel is coming back is its unprecedented effort to cut costs. The word out of its Santa Clara headquarters is that every aspect of Intel, from manufacturing plants to corporate travel, is being besieged by bean counters looking to shave expenses.
Mike: Well, it’s got to, because if it’s selling more low-price Celeron chips, its overall profit margins are in danger of shrinking. So it has to protect those margins any way it knows how, both by selling more upper-end, high-margin Pentium chips and by cutting costs.
Jim: Now if you buy Intel, you must expect that any time Wall Street senses a slowdown in PC sales, Intel tends to get whacked. We’ve seen it over and over again. But all signs point to PC sales’ being fairly strong again in ‘99, which is one more reason I’d buy the stock.
Mike: You know, as you look back at the recent history of this company, it’s hard to pinpoint a time when it wasn’t a good idea to buy Intel. And even if PC sales look as if they’re going to dip and Intel gets taken down in sympathy for a while, it’s still a good buy. This is a powerful company.
Jim: Its track record really is impressive. Over the last five years, the stock’s total return has soared more than sevenfold, or nearly 50% a year on average. We should also note that Intel has new management, led by CEO Craig Barrett.
Mike: I think one of the remarkable things about Intel’s turnaround, especially with the Celeron chip, is that it’s happened under the company’s new watch--which is to say, Andy Grove has graduated and gone to wherever great CEOs go when they retire.
Jim: Grove being the man who made Intel what it is today, and Barrett’s mentor.
Mike: Grove’s motto, as you know, is “Only the paranoid survive.” He made this company paranoid, I think, in a good way. It’s always worried about who’s coming up on its rear and on its flanks. And Barrett seems to have taken that lesson to heart, which only bodes well for the future.
Jim: So does the fact that Intel’s stock, despite shooting higher in recent months, is still trading for only 28 times the $4.25 or so a share it’s expected to earn in 1999. That’s an attractive entry price for one of the leaders in the fast-growing technology sector.
Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.
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Intel
Monday: $120.81
