“On Thursday, after the close, Intel reported a super-duper “I love you, you love me” total blowout. They outpaced The Street’s consensus earnings by ten cents on strong sales …When the company blows numbers out like Intel you want to throw up your hands…Intel is selling more chips and getting more money for them. As the average selling price for microprocessors was up, even as PC pricing is coming down…

The bottom line, Intel may have sold off the day after reporting the fabulous fourth quarter but the pull-back was because the stock was ahead of itself.”– CNBC’s Mad Money 1/19/2010

Intel Corp. (INTC) delivered a tremendous fiscal fourth quarter last week, but the stock gapped down nearly 3% on the following day and has yet to recover.  This head-scratcher of a situation has CNBC’s star pundit Jim Cramer felling bullish on Intel, and he even said that he’s increasing his exposure to Intel in his Charitable Trust if it falls below $20.  We can understand why he is bullish on Intel upon completing a great second half to 2009, and the turnaround in technology spending (just as Intel’s CEO predicted last September) is being solidified through results from other technology bellwethers like IBM (IBM).

Intel’s lack of appreciation after a great quarter has led to a frenzy of analysts increasing earnings targets over the past week.  According to Yahoo finance, 36 out of a total of 45 analysts following the stock have increased their predictions for 2010 EPS and lifted the consensus from $1.64 to $1.79 in just a week’s time!  Despite the improved performance for Intel over the last two quarters and the improved outlook for 2010, the stock has actually substantially underperformed the rest of the Technology sector over the last six months as measured by the iShare (IYW).  Intel has returned about 10.5% compared to the sector performance of over 20%.

At Ockham, our valuation methodology rates this stock as Fairly Valued.  One criterion in our analysis is a look at current price-to-sales metrics compared against historically normal ranges.  Over the last ten years the market has been willing to pay between 3.1x and 5.6x sales per share, and the current multiple is on the low end of that range at 3.3x.  Similar historical studies of price-to-cash earnings, historical ROE, etc show a similar story: Intel is neither overvalued nor particularly undervalued.  Judging by the way the market has traditionally valued Intel shares and comparing that with current fundamentals, we think a price between $19 and $26 would be in line with historically normal valuations over the past ten years.  However, the fourth quarter demonstrates Intel is really hitting its stride right now, and may finally begin to command a better valuation in the marketplace shortly.

“Dividends — well, the yield that usually tends to bring in buyers who stem the decline. And unlike the income you get from treasury bonds, which are considered the safest investment…You reinvest your dividends — let’s take McDonald’s 3.5% yield. You’d still double your money in about 21 years…

But Intel? McDonald’s? Clorox? Sanofi-Aventis and Eaton? They strike fear in the hearts of the bears and turn ferocious ursas into, well, Yogi, into Boo-Boo, into Gentle Ben, into koalas, into cub scouts!” — CNBC’s Mad Money 11/30/2009

Investors who have paid attention to Cramer during the last six months know that the rally has had no more ardent cheerleaders than Mr. Mad Money himself, Jim Cramer.  However, even he cannot deny that the market is starting to become a bit more risky.  The risk is not due to the real estate debt scare in Dubai, which Cramer says will probably blow over with little impact on the U.S. market.  That being said, he believes there are a lot of bears ready to pounce and the Dubai World debt incident may provide a catalyst to short the market.  Of course, after a sustained rally as we have experienced since March, it would be understandable to see at least some correction to cool this market down.

In anticipation of a possible correction or a full blown sell off, Cramer is advising viewers to consider dividend stocks like Intel (INTC), McDonald’s (MCD), Clorox (CLX), Sanofi-Aventis (SNY), and Eaton (ETN).  Obviously most of these stocks are defensive in nature and will be less harmed by a sell off.  In addition, the fact that short sellers have to pay dividends should protect these high yielders from excessive shorting punishing the stock.

At Ockham, we have also become skeptical that this market’s risk-reward profile provides enough upside to be aggressive.  The valuation of the market has become precarious given current (weak) fundamentals, and if Cramer is correct short sellers may start to dig in and wait for the correction.  That would suggest that not only is valuation unfavorable but sentiment may be turning negative as well.  Some people follow what Cramer says, while others see him as a contrary indicator.  We simply think it is worthwhile to know what he is talking about, because like it or not, he moves stocks.  The chart to the right shows each of the stocks he mentioned on Monday night’s show.

As the market turned decisively negative on Thursday morning, no sector was hit heavier that the semiconductor industry.  An analyst at Bank of America Merrill Lynch (BAC) downgraded the entire sector’s outlook from “positive” to “negative” and also downgraded 8 stocks in the sector.  The most notable downgraded stock in the sector is Intel (INTC) which is trading 5.5% to the downside on heavy volume.  BofA had been among the more bullish on Intel with a price target of $27.00, but in today’s announcement they reduced that target significantly to $21.50.  Others stocks suffer downgrades include Texas Instruments (TXN) and Marvell Technology Group (MVRL).

Among the reasons for the bearish note on chip stocks were weaker trends in PC supply chains.  Bank of America contends that Intel and others have been shipping a greater number of CPU’s than PC’s that have been shipped, which suggests there is ample supply of chips to accommodate any build in PC demand.  The note went on to say that unless there was a sharp upturn in the economy there is a possibility of an inventory correction.  This scenario has skewed the risk-reward negatively and prompted the downgrades.

Intel and other chip stocks had enjoyed a decent run of late and that is partially due to positive comments from Intel’s CEO as he anticipated strong performance from a PC refresh cycle.  In September, Mr. Otellini made comments about the convergence of the upcoming release of Windows 7 (MSFT) and corporations starting to loosen the purse strings for IT spending as reasoning why the future is bright.  However, the market has not really caught on to the CEO’s pep-talk as the stock now sits lower than it did then, and the overall analysts action has been to lower estimates in the last month.  Perhaps the growth of the corporate IT refresh cycle is still coming, but up until now it must be a disappointment to Otellini.

As of this week’s report we are reiterating our Fairly Valued stance on Intel as it is trading about where we would expect given the current fundamentals.  It is trading within the historically normal ranges of price-to-cash earnings and price-to-sales.  In fact, it would take either a substantial improvement to fundamentals or for the price to drop another 15% for us to become more bullish on Intel.

Intel’s (INTC)CEO gave a very informative interview to London’s Financial Times on Thursday, in which he discussed reason for optimism for his company in the year ahead.  Intel’s stock has recovered after hitting its lowest point in more than a decade in February of this year.  The world’s largest chip-maker was pinned down by struggling sales, especially from corporate customers who were left reeling by financial crisis over the last year. 

Intel’s Paul Otellini has not been shy about his belief that the worst is behind his company.  Analysts have taken notice to his upbeat outlook for Intel and apparently they agree, as the estimates for Intel’s current quarter and fiscal year have edged up considerably in the last 90 days.  Below is the key section of Otellini’s interview, but you can find the full article here.

“I think corporations’ capital budgets got clamped down fairly aggressively at the end of last year. But in terms of PC refresh I would expect that now to happen in 2010 … The fleet of PCs is getting fairly aged; most corporate notebooks are now over four years old, desktops are over five years old, they need to refresh,” he told the Financial Times in a video interview.

Mr Otellini also highlighted the upcoming launch of Windows 7 operating system by Microsoft next month, saying it would have a big impact on corporate spending: “I think that Windows 7 will help drive a refresh in corporations and we’re cautiously optimistic we’ll see that in 2010.”

Otellini sees a bright future with the aging fleet of computers in companies across the globe.  It has been the consumer who has helped the industry plod along during this difficult period, but there is much more potential in corporate IT spending.  Obviously, Intel and Microsoft (MSFT) were disappointed by the adoption rates of Windows Vista operating system.  Both firms are optimistic that Vista was simply a one time hiccup and Windows 7 has a more successful launch.  One thing we know is that technology continues to evolve and chips will need to be bigger and faster to run Windows 7 versus the soon to be two generations ago, Windows XP.

At Ockham, we currently have a Fairly Valued rating on Intel after the stock has had an impressive run since its lows.  INTC is trading within its historically normal range of price-to-cash earnings, but it is trading well below its historically normal range of price-to-sales.  It is clear that Otellini believes his stock is undervalued, and he may be right.  As of right now, Intel is trading within our expected price range of $18 to $25.

After reporting better than expected second quarter earnings, Marvell Technology Group (MRVL) is among the largest gainers, up more than 4.5% midday.  The quarter just ended saw the company earn 18 cents, which was better than the street’s expectation of 15 cents per share.  Although revenue fell by 24% from a year ago, the top-line came in better than expected as well at $640 million versus $619 million.  Sequentially revenue improved by 23%, suggesting perhaps the fiscal first quarter was the low point.  The semiconductor-maker topped analysts estimates even though 11 of them have raised earnings expectations within the last month, versus zero analysts become more bearish.  Furthermore, the results even topped Marvell’s own call in June to lift 2Q revenue guidance because of increased demand among various end-markets. 

Most importantly, Marvell management was more optimistic about the current quarter as they raised guidance significantly.  They are now anticipating EPS in the range of 18 to 26 cents, whereas the consensus estimate had MRVL pegged for just 17 cents per share.  They are also lifting revenue projections to $680 million to $730 million, much better than the $640 expectations. Perhaps most impressive was the companies greatly improved gross margins, which came in at 55% on a GAAP basis, versus 50.6% in the first quarter, and 51.8% last year.  This improved profitably lead to free cash flow of $175.3 million or 6% better than a year ago and 33% better than last quarter.

We are encouraged by recent developments among chip-makers, including Intel (INTC) which has raised guidance today as well.  All the trends are quickly moving in the right direction for Marvell, and after two light quarters for earnings, they are starting to normalize.  Today’s earnings report does nothing to dissuade us from our Undervalued rating on MRVL.  It is rare for a company to remain undervalued after more than tripling from its low point, but that just goes to show you just how oversold Marvell was in late 2008.  We think that Marvell is still quite attractive and may have the potential to rise into the low $20’s, possibly by the end of 2009.

“…Brighter future for chips in the way of boosted guidance coming out of Intel this morning. Boosting its third quarter sales forecast as demand topping its estimates, boosting its sales and margin outlook, certainly one of the big reasons we’re in the green, Marvell another chip maker came out with earnings better than expected. Its outlook very strong. So you’re seeing healthy gains here and also seeing healthy gains in what chips go into, personal computers, PC’s, we have three brokerages that raised their price target on Dell after the number two PC brand in the world reported stronger than expected profits on Thursday. Yesterday of course after the bell, the company reported that cost cutting as well as the ability to keep prices from the sticker price on its personal computers.” — Fox Business Network 8/28/2009