Intel's Third Quarter a Mixed Bag
Plus our take on Yahoo's strong 3Q and TransCanada's Alaskan pipeline prospects.
There was little from Intel's INTC third-quarter earnings conference call held Tuesday evening to change our view on the stock or our fair value estimate of $22 per share. Sequential sales growth of 5% was tepid by historical norms but consistent with the revised outlook the firm gave at the beginning of September. Intel believes end-market demand for PCs is fine, but that its customers hold slightly too much inventory. This view also potentially supports the possibility that rival Advanced Micro Devices AMD gained market share in PC processors. Intel's inventory, which had been rising, fell $53 million. But this drop was at least partially driven by inventory reserves Intel took in the quarter. The firm would not disclose the size of these reserves, but it's possible that inventory would have been flat or even up without the reserve. The charge Intel had to take for these reserves also possibly explains the additional weakness in its gross margin below its own estimate. All told, we saw some positives in the quarter (the firm regained some share in flash memory chips, for example), but we think the inventory issue still bears watching, as does the risk that Intel may respond to competitive advances by AMD with aggressive chip pricing.
Our fair value estimate for Yahoo YHOO may increase slightly due to the company's greater-than-anticipated revenue growth in its third quarter (as announced late Tuesday), but we still think that the shares look expensive. Yahoo's results in its advertising and premium sales efforts were strong, and the company is growing its recurring revenue base with more than 7 million paying subscribers, compared with 4 million one year ago. Year to date, Yahoo has increased revenue by more than 100%, which was well ahead of our expectations. The company also had impressive operating cash flow of more than $250 million in the quarter and more than $200 million when excluding the benefit from employee stock options.
The proposed Alaska natural-gas pipeline got a boost from Washington this week when the Senate approved $18 billion in loan guarantees to finance the project. The provision, originally part of the stalled energy bill, was included in the tax bill that is now headed to the president's desk, where it is expected to be signed. While the project must get several additional regulatory approvals before it can proceed, the loan guarantees represent important progress toward making the pipeline a reality. We think this project could substantially benefit TransCanada TRP because the pipeline would likely connect to the company's current system. Those benefits are far into the future, however. The project still faces many regulatory hurdles and a lengthy construction schedule once it is approved.
Michael Cumming, CFA
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