When it rains it pours. No, I’m not referring to the Morton’s salt ad from years gone bye but rather to the current state of the economy.
Every day it seems there’s a new shoe to drop. On Wednesday, it was electronics retailer Best Buy (BBY) that put a scare into the market as it slashed its 2009 earnings estimate and called the current retail environment the worst in its 42 year history.
After the bell Intel Corporation (INTC) spooked the market as the world’s largest chipmaker unexpectedly cut a forecast that was already a bit gloomy. Just a month ago INTC stated that revenue for the quarter will be in the $10.1 billion to $10.9 billion range.
Instead, the company now says sales for the quarter will be $9 billion, plus or minus $300 million. In addition, margins will likely decline by 4 percentage points to 55%. The company blamed "significantly weaker than expected demand in all geographies and market segments." When it rains it pours, indeed. (See also: "Time to Bet Against the Market.")
Consumers are cutting back on purchases of PCs, which is not only hurting the computer makers themselves but also the suppliers. So INTC, as the world’s largest supplier of microprocessors with about 80 percent of the global market, gets hit first as the PC maker uses up inventory in an effort to save money.
INTC said Wednesday that the entire PC supply chain is aggressively reducing inventories due to low expectations for sales in the coming months, and PC makers don’t want to get caught with excess stockpiles of chips.
One area of strength for INTC has been its Atom microprocessor, used in the new breed of laptops called netbooks. Netbooks are primarily used for surfing the web or sending e-mail. However while sales of netbooks are brisk, profit margins are a lot slimmer. Still, Intel claims the overall effect of the Atom on its margins has been healthy.
The news at INTC should really come as no surprise. The company had only recently scheduled its first mid-quarter update in three years for December 4 signaling that trouble may be brewing. Some analysts thought Intel would take advantage of an oversold market to give slightly more conservative guidance, but the actual numbers undoubtedly raised some eyebrows.
This is a substantial reduction in business at INTC. Analysts are now questioning how far into the downturn the industry is and how much is left to go. Will we have a long deep recession as many expect?
Shares of INTC dropped immediately on the news, but given how low shares now trade its price actually recovered with the market open for trading on Thursday. I would hold off on purchasing INTC stock until signs of a bottom are reached.
That said; if you already own the shares there’s no use in selling now. Longer term the company’s prospects are solid, especially as the current downturn could leave some competitors critically wounded. The company’s balance sheet is in stellar shape and the $12 billion in cash it shows could be put to good use buying back stock at depressed prices.
A rebound will come, in time and INTC will be well positioned when it arrives.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
