Intel Looks a Gift Horse in the Mouth - TheStreet

Intel Looks a Gift Horse in the Mouth

The chipmaker got a pass from the media on its eroding margins, but it can't leave well enough alone.
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Intel's (INTC) - Get Report director of investor relations begged an audience with The Business Press Maven, who, kind and merciful soul, granted it.

In all seriousness, as almost all readers who have written know, when you write to disagree with my assessment of the media coverage of a stock, I will give your thoughts and perceptions serious consideration and write back, whether you are a high-placed corporate official, Wall Street hack or owner of 37 shares of an $8 stock.

Our economic system is, at its best, a marketplace of ideas and perceptions, and I respect that entirely. I also know that I am not always right. Just almost always.

The Wrong Story ... Again

Here's the deal with Intel: When the company recently reported earnings, the focus of many of the headlines and ensuing articles was on the profit jump. "

Hogwash," sniped The Business Press Maven. The company is engaged in a pitched battle with

Advanced Micro Devices

(AMD) - Get Report

, its main chip competitor, on price.

Business media focus should be on gross margins, which in this case, fell like a stone strapped to a rock. OK, maybe not that bad. But they came in at 46.9% when 48% was expected. Moreover, the company said that pricing pressure was worse than it expected, but it held out solid hope for a recovery of margins to the flush level of -- get this -- 52% in the third quarter.

Intel is a great company. And if any company could achieve such a reversal in fortune, perhaps Intel can. But to me, the central issues were these: What was happening with the margins and where the company claimed they would go, and how realistic was its thinking on price?

For the savvy investor looking to gauge how Intel was handling the challenge, this was a far more meaningful number than any flashy jump in profit. (It bears mentioning that when AMD's

earnings soon followed, some of the coverage did not even mention gross margins; that had The Business Press Maven tempted to do bodily harm to himself.)

First Contact

Surprisingly, perhaps, The Business Press Maven and Intel agreed that the business media got the focus of their articles wrong. Did we both believe the focus should have been on gross margins? Well, not exactly. Kevin Sellers, Intel's director of investor relations, wrote me a letter suggesting a key issue that "no one picked up on."

Those, of course, are words that make The Business Press Maven swoon. So what was the deal, at least according to Sellers?

Wrote Sellers: "We reduced our own inventory by ~$250M in the quarter ... not bad, especially when our forecast was 'hope to keep it flat in a seasonally down quarter.' Think of this: What if we had wanted to prop up margins? We easily could have by, instead of realizing the inventory reductions, ran more wafers and absorbed that reduction into product cost and put it on the balance sheet."

In other words, Intel's decision not to increase product production but to do an unexpected pruning of inventories instead was -- as the company sees it -- an unremarked-on hidden benefit to shareholders.

And what is The Business Press Maven's verdict on this? Baloney, I snipe. Look, unless the amount of crustaceans I ate on vacation has slowed my brain, this is how I see it (you are welcome to email me if you disagree):

Should Intel have chosen to produce more

and

keep its inventory -- well, at least theoretically -- wouldn't the comparative flood of product put even more pressure on price? It certainly wouldn't have helped. Sorry, Sellers, but to me, the business media's lack of focus on inventory reductions played more to Intel's benefit than to its harm.

The End of Merger Mondays?

Let's move on to how, on the eighth day, God created ... completely new fundamentals. He didn't, of course. The Big Fella has more important things to do than to tinker with the stock market. And even if He did want to pull some strings, it would probably take more than seven days to engineer a wholesale change in fundamentals.

But I don't know that we've had a better example of how the business media front-runs market action to reframe their take on basic fundamentals than the period of time between July 19 -- when the

Dow Jones

passed 14,000 -- and July 27, as the market finished up a tough week.

Take a look at almost any publication. Remember that old Wall Street saw about how the news is supposed to make the tape? In the modern environment, what is on the tape makes (or forms) the news.

The New York Times

runs what is called

a curtain opener for today's stock market action, looking forward at what might happen in light of last week's trouble.

Now, the Business Press Maven believes that merger action, much of which has been announced on Mondays in what has become known as "Merger Monday," has been overheated, and no investors in their right minds can rely on it lasting at the current level. But what does the

Times

say prominently in the wake of the Dow's difficult week?

"But given the rout in the markets last week, 'Merger Monday,' as the day is known, may be on hold -- indefinitely."

"On hold -- indefinitely." Wow, will we never have another Merger Monday again? That is some serious, long-term stuff. But what, interestingly enough, did this same

Times

journalist say about mergers one week before, right after the Dow hit that heady new high?

Check out this

prominently placed quote, right beneath a statistical breakdown of all the merger action:

''When credit is fairly available, when interest rates are fairly low and stock prices are not expensive and when top-line growth is pretty good because of world growth,'' said Robert C. Doll, vice chairman at BlackRock, the asset-management company, ''that is a recipe for companies buying equity.''

Was there anything about the indefinite suspension of mergers one long week ago? Well, not exactly. Keep that in mind the next time you are tempted to follow some doomsday scenario laid out by the business media. Even if you are bearish, for a bit of perspective, look at what that same journalist was saying a few days ago.

At the time of publication, Fuchs had no positions in any of the stocks mentioned in this column.

A journalist with a background on Wall Street, Marek Fuchs has written the County Lines column for The New York Times for the past five years. He also contributes regular breaking news and feature stories to many of the paper's other sections, including Metro, National and Sports. Fuchs was the editor-in-chief of Fertilemind.net, a financial Web site twice named "Best of the Web" by Forbes Magazine. He was also a stockbroker with Shearson Lehman Brothers in Manhattan and a money manager. He is currently writing a chapter for a book coming out in early 2007 on a really embarrassing subject. He lives in a loud house with three children. Fuchs appreciates your feedback;

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to send him an email.