When we last discussed Intel Corp. (NASDAQ:INTC), we explained why the dividend was in jeopardy and issued a warning to dip buyers.
This rating indicates a 33-50% chance of a dividend decrease during the next 12 months. Despite the dip, INTC is not cheap, despite our favored metric plunging towards the “buy range.” The fundamentals are terrible, and the dividend is unsustainable. That story had over 200 responses, with fans and critics equally divided. That call looks true, at least based on price activity, as INTC punished dip-buyers with a fury. We want to focus today on how our call is shaping up fundamentally and what will need to happen for Intel to be a worthwhile investment.
The Fundamental Thesis
At times, the analytical community lags behind fundamentals. It takes some effort to move a tanker and much more effort to induce the analyst community, which has been consistently positive, to shift to neutral or even become pessimistic. This became very clear when we examined profit projections. We believed it had a long way to go, and now we’re seeing them dive in droves. Earnings predictions have decreased across the board. As a result, we are witnessing a unique situation in which analysts are pricing a year-over-year earnings decline.
This is a significant problem for people who are unaware. Analysts find it difficult to believe that earnings might fall year over year. However, this figure suggests that reality is now setting in. Revenue forecasts, on the other hand, remain exceedingly optimistic. As a result, here is where the rubber hits the road. The estimates for the 3rd quarter of 2022, which are most likely true at this stage, are $15.54 billion, with earnings of 14 cents.
With the economy faltering, our base assumption is that the quarterly run rate of $15.5 billion in Q3-2022 is optimistic for 2023. Furthermore, given Intel’s bloated inventory levels, margins are expected to approximate what we saw in Q3-2022.
So, do you want to buy this company with a quarterly earnings run-rate of 14 cents? If P/E ratios are used, the response should be a loud “no.” Intel would be selling at over 60 times earnings, unable to fund even half its present dividend.
Where Is The Turn?
Earnings are poor indicators in cyclical firms since they look great at the top and terrible at the bottom. However, we believe that they have not yet bottomed and that the company will suffer as our out-of-context dividend cut stance becomes popular.
Our reasoning is based on the macro data we examine, which are beyond bleak. It’s not an exaggeration to claim that we’ve never seen anything like it. For example, consider South Korea’s trade imbalance, a leading indicator for the semiconductor index (SMH). That trade imbalance explosion is significantly worse than the one in 2008.
New export orders in Taiwan, another vital sign to watch, are also falling. These are just one of many data points, but the idea is that we should expect a cyclical bottom at least 12 months after these appear.
CHIPS Act & Brookfield Asset Management (BAM) Deal
Passing the CHIPS Act will help offset what is sure to be a miserable year for the semiconductor index. Over the next five years, we approximate about a net benefit of $10-$15 billion. Even if we add $5.0 billion in 2023, we won’t be able to fund the dividend with free cash flow. That free cash flow is even before capital expenditures.
BAM’s acquisition, at around 8.5%, is highly credited positive and relieves some of the pressure on the dividend in the short term.
According to the company’s Chief Financial Officer David Zinsner, the contract is a first of its sort for the industry since Intel will cover 51% of the cost of establishing new chip-making facilities in Chandler, Ariz., and will have a majority position in the financing vehicle that will own the new company. He noted that Brookfield would control the remaining shares, and the firms would divide money generated by the plants.
We did not have this information at the time of our previous piece. Still, the deterioration of macroeconomic conditions has obliged us to maintain the same chance of a dividend decrease. Therefore, this rating indicates a 33-50% chance of a dividend decrease during the next 12 months.
Verdict
It pays to be a contrarian and even more to wait for fundamentals to match the contrarian position. We have correctly avoided this name for a long time since we identified a multiplicity of hazards with limited upside. The lower the price, the better because every dollar saved increases your chances of making a profit. We don’t believe we’ve arrived yet. The analyst community has to project earnings into reality before we take a plunge. For the time being, we remain neutral and rank Intel as a hold.
Featured Image – Megapixl © Miluxian
