Intel Q1 2020 – The rampart

Intel is well exposed and looks defensive.

• Intel reported good results and guidance but the withdrawal of guidance for the rest of the year spooked the market despite Intel’s very defensive looking valuation.
• Intel reported revenues / EPS of $19.8bn / $1.31 ahead of estimates of $18.8bn / $1.23 and guided reasonably well for the Q2 2020.
• Q2 2020 revenues / EPS are expected to be approximately $18.5bn / $1.04 ahead of revenue estimates of $18.1bn but below EPS of $1.08.
• As expected, Intel has seen strength in both the data centre and in its client (PCs) business driven by the move to the cloud caused by the lockdown as well as device upgrades for homeschooling and home working.
• However, Intel withdrew its estimates for the full year in light of the current economic uncertainty which is understandable as there is no one that can predict the next 9 months with any degree of certainty.
• However, the market took this badly pushing the shares down by 6% in after-hours trading.
• In my sea of bearishness, I think that Intel is relatively well-positioned for two reasons.
  • First, lockdown trends: in the absence of a vaccine being available in billions of doses, nothing is going to go back to the way it was.
  • This means for the rest of 2020, social distancing is going to be the norm which means offices running at 50% capacity.
  • In order to achieve this, 50% of the workforce will still be working from home at any one point in time and rotating between home and office to meet the distancing requirement.
  • This means that demand to upgrade productivity equipment at home is likely to be sustained for longer than most people think.
  • The general view seems to be that the economy will go back to the way it was as soon as the lockdown is lifted which given China’s example seems very unlikely.
  • Hence, I think Intel’s client business will continue to outperform and beat expectations in Q2 and Q3 complimenting the obvious ongoing strength in the data centre.
  • This is not priced into expectations in my opinion.
  • Second, valuation: Intel is one of the cheapest shares in the entire technology sector.
  • Intel is not exciting. It is not Internet or mobile and has made a hash of a lot of things, but critically it is very profitable, leads the market in one of the industry’s current hot spots, is cash generative and trades at 12.3x 2020 EPS even after a round of pandemic-related estimate cuts.
  • The S&P500 is currently trading on an unbelievable 21.1x 2020 earnings as a result of estimate downgrades and the federal reserve pumping trillions of dollars into the debt market.
  • Going into a recession, this is completely unsustainable, and I am expecting a big correction.
  • Seeing as Intel’s PER ratio is already very low, it is likely to correct far less with the market compared to others like Google or Facebook making it very defensive.
• I would still look to hold Microsoft, Amazon and Alibaba for the purely momentum-driven pandemic cloud theme but the risk of these three is the falling tide that sinks all boats.
• In the event of a major market correction, I would expect them to fall less than the market, but potentially more than the likes of the cheap and cheerful stocks like Intel, Seagate etc. who have much less PER to unwind.
• Given that Intel’s valuation is already very low, I think it will sink less than most.
• Hence, if I had to have an equity portfolio, I would include Intel alongside the cloud stocks.