Intel Corporation (NASDAQ:INTC): Goldman stated that a potential reduction in Intel’s 2013 capex budget is likely to be viewed as a positive for shares due to the fact that it would address excess supply and improve cash flow. The firm gives the shares a Sell rating and a $16 price target.
Here is the full report
March 27, 2013, 11:19 A.M. ET
Intel: Cut Spending, Says Goldman, PC Inventories Too High
By Tiernan Ray
Shares of Intel (INTC) are up 9 cents, or 0.6%, at $21.86, as Goldman Sachs’s James Covello offers a suggestion: cut capital expenditures.
Covello, who has a Sell rating on Intel shares, and a $16 price target, thinks a 3% climb in the shares through yesterday was all about investors expecting Intel would cut some of the $13.5 billion in spending it has planned for this year. After spending 100% of operating cash flow in seven of the last eight quarters, on capital spending, on dividends, and on share repurchases, net cash fell from $20 billion to $5 billion from Q4 of 2010 through Q4 of last year.
Covello thinks PC inventories are too high, and that Intel has been unnecessarily contributing to that inventory build-up:
If Intel were to significantly reduce capex to about $7-$8 bn, then we would likely be less negative on the stock. As we have written previously, the primary reason for our Sell rating is our view that Intel’s robust capex has created excess supply. For example, Intel’s 4Q12 fab utilization was about 50%, and PC OEM inventory is near a multi-year high (Exhibit 2). We do not believe a small capex reduction would be sufficient to fix the supply problem, as Intel already added significant capacity with its capex increase to $11 bn in 2011 and 2012 from about $5 bn on average in 2007-2010. In addition, our hardware team expects 2013 PC units to decline slightly yoy.
The equipment makers wouldn’t be hurt too much, Covello thinks, by a cut in spend by Intel, given “Intel’s orders to the SPE companies are currently very low and this is unlikely to change that.”
“In fact, we believe one reason investors expect a capex cut is due to comments from the supply chain on low logic orders.”
Covello models Intel making $53.4 billion in revenue this year and $1.65 in GAAP EPS. That is below consensus of $53.8 billion and $1.93.
Yesterday's run up had nothing to do with CAPEX spending. The guy Covell obsesses about CAPEX to the point he ignores everything else. If you look at analyst remarks every year he says Intel's CAPEX is too high. The guy does about zero analysis. He has been an Intel bear as long as I remember. His $16 price target is utter fantasy. If it does go there, I will put every penny I can into the stock and collect the 6% dividend.
That firm was involved in one of the biggest scandals in American history during the financial crisis & should not be in business let alone taken seriously, they have no honor, it there is such a concept anymore IMO.
What a riot. GS is re-positioning itself. Essentially, they are wrong and are backing away from an untenable position. Analysts are wrong about Intel spending too much and I said so after the last quarterly earnings report.