Tuesday, October 9, 2012

Intel: Best Port in Semi Storm, Says MKM

MKM Partners’s Daniel Berenbaum today writes that given rising expectations for a semiconductor rebound, it pays to stick with Intel (INTC), one of the cheaper of the bunch, at just 9.6 times earnings per share.

Berenbaum observes that investors are bidding up semi stocks, assuming Street estimates are now too pessimistic — “the classic �buy semis when they look expensive� trade,” he writes.

But disappointing results from Texas Instruments (TXN) and Altera (ALTR) last night make it very trick to gauge the shape of recovery, he thinks.

“Both suggested that they were under- shipping end demand, but our sense is that this continues to be much more than a simple inventory correction.”

Further clues will come next week when Broadcom (BRCM) and distributor Avnet (AVT) hold analyst day briefings, and from Best Buy’s (BBY) quarterly report on Tuesday.

But Berenbaum’s main concern is how Intel is holding up well despite apparent weakness in the PC market. He believes Intel’s story, which is that the industry just doesn’t do a good job of tracking all the places Intel’s chips go:

the perception that INTC is vastly over-shipping PC demand is oversimplified. On a comparable basis, INTC�s trailing nine-month (1Q11-3Q11) PC client MPU revenue was up 15% y/y, vs. Taiwan ODM (notebook + motherboard) units up 1% y/y. Our work suggests this has been driven by three primary factors: 1) Share gain vs. AMD, 2) stronger ASPs (including mix shift away from Atom), and 3) growth in emerging markets that are not served by traditional ODMs. We agree with INTC management�s assertion that Latin America, and Brazil in particular, is driving much of this demand. Brazil is now the third-largest PC market (up 13% in 2011), and protectionist tariffs strongly favor domestic PC assembly. We believe the vast majority of PCs sold in Brazil are assembled locally, and are likely not fully captured in global statistics.

Intel shares today are up 25 cents, or 1%, at $24.97.

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