Breakingviews - Corona Capital: Precious Metals, Share Sales, Toys
NEW YORK/LONDON/MUMBAI (Reuters Breakingviews) - Corona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.
Gold bullion is displayed at Hatton Garden Metals precious metal dealers in London, Britain July 21, 2015. REUTERS/Neil Hall
LATEST- Bullish on bullion
- Taking stock of bonds
- Jenga vs. Barbie
ALL THAT GLISTERS. Precious metals are on a tear. Gold prices hit a record peak above $1,944 an ounce while silver reached a seven-year high on Monday. The dollar is sagging to two-year lows against a basket of other major currencies and both metals usually rise when the greenback weakens since they are priced in the U.S. Currency. But there’s more going on: Both the euro- and Swiss franc-denominated price of gold are also galloping higher.
Both metals are ever more popular as central banks adopt increasingly unorthodox monetary policies. And safe havens like the yellow metal benefit whenever concerns flare about a new wave of infections, trade wars, or anything else that might hurt economies. Silver’s rally also has a green twist to it. The more eye-catching precious metals’ gains, the bigger their fan club will grow. In a world of disappearing yields, investors may have little choice but to turn into gold bugs. (By Swaha Pattanaik)
FAIR SHARE. Britain’s equity-hike bonanza is slowing, capital-issuance figures from the Bank of England show. Having raised 5.2 billion pounds of equity in May, roughly double April’s haul, private non-financial corporations sold just 3.8 billion pounds of new shares in June. Issuance of bonds, net of repayments, surged to 7 billion pounds from 100 million pounds in May.
The flagging equity issuance is a worrying sign. With the UK economy struggling to recover, company balance sheets are probably in a much weaker state than they were coming into the crisis. The fact that companies are now favouring bonds over share sales suggests leverage ratios may be rising. With the FTSE 100 Index down 6% from June 5, and investors fretting about a second wave, struggling firms like Rolls-Royce could soon find it harder to attract the equity they probably need. The brief window for share sales may already be closing. (By Liam Proud)
TOY STORY. Players of Jenga know moving one block can upset the whole structure. For Hasbro, which markets the game, something similar applies. It reported a 29% decline in second-quarter revenue, driving its shares down as much as 8%. Underneath that number is a criss-cross of competing forces.
Customers are buying Hasbro’s games and toys in greater numbers. But retailers are slimming down inventory, so the $10 billion company’s sales fell. Temporary factory shutdowns mean retailers can’t always get the stock they need. Meanwhile big brands are squeezing other suppliers – for example, cutting advertising spend.
Rival Mattel reported a similar trend last week. Sales of Barbie dolls are up 35% – but Mattel’s revenue from the famous doll rose just 7%, and its overall top line fell 15%. Both companies cut ad spend by more than one-fifth. Unlike Jenga, supply chains don’t create a single winner. But the game is to avoid losing more than your opponent. (By John Foley)
CRASH-LANDING. Travel companies’ getaway plans have been kyboshed by Prime Minister Boris Johnson. Shares in holiday operator TUI and airlines easyJet and Ryanair fell by 14%, 12% and 8% respectively on Monday after the UK government summarily announced a two-week coronavirus quarantine on sunseekers returning from Spain – Brits’ most visited foreign tourist destination – and advised against all but essential travel to the Spanish mainland following a surge in infections. The move coincided with Ryanair cutting its already shrivelled annual passenger target by one-quarter and warned of further declines if a second wave of the pandemic materialised.
In response, Hannover-based TUI has suspended holidays to mainland Spain for two weeks, although Ryanair and easyJet will continue to fly there. The former is particularly vulnerable given its precarious net debt load – equal to roughly 4 times estimated 2021 EBITDA. If Germany follows the United Kingdom’s approach, TUI’s balance sheet will be tested to breaking point. (By Christopher Thompson)
WARM WELCOME. Barbados is seizing on pandemic office closures. The Caribbean island has launched a year-long “work from home” visa to lure non-resident professionals. The Barbados Welcome Stamp allows anyone to work remotely on the island for 12 months for $2,000 per person or $3,000 for a family, and can be extended for a further 12 months. Those eligible for the visa would not pay Barbadian income tax.
The jury is still out on the impact of the pandemic on how we work. But the emergence of a market for remote working from holiday or exotic destinations might trouble financial centres such as London or New York. It could be a desirable benefit for new hires in jobs where office attendance is not mandatory and might even open ways to save money on tax. Governments, keen to get offices back to work and keep the infrastructure around them afloat, will be watching closely. (By Dasha Afanasieva)
NOT A GREAT LOOK. Aditya Puri is cashing out at a delicate time. The long-standing boss of India’s $82 billion HDFC Bank, the country’s top lender by market value, sold a 0.13% stake worth $113 million last week, according to a stock exchange filing on Saturday. The sale leaves him owning just 0.01% ahead of his expected retirement in October. The proceeds may help him to exercise outstanding share options upon stepping down.
The bank is well capitalised and looks in better shape than peers amid the pandemic: borrowers have taken up an interest-repayment holiday, endorsed by the regulator, on about 9% of HDFC’s loan book, less than one-third of the average for private sector banks. Still, there is much uncertainty. Industry-wide bad loans might double to 20% of the total. And HDFC is yet to name Puri’s successor. The share sale strikes a poor note. (By Una Galani)
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'Corona' Among The Most Searched For Girls' Names, While Braxton, Zion And Hunter Top List For Boys
Would YOU call your child Corona? Virus-inspired moniker makes the 100 most searched-for names for girls - while astrology-related names like Aurora and Nova top the listThe coronavirus pandemic has had a huge impact on nearly every area of life, and it appears that even baby name choices have not escaped the reach of the virus.
The name Corona is the 100th most searched for girl's name, figures from US parenting website The Bump have revealed.
A huge trend for 2020 appears to be astrological-inspired names, with both Aurora and Nova among the top 10 of most searched girls' names.
Topping the list was Mila, followed by Aaliyah and then Aurora, while for boys, the top three were Braxton, Zion and Hunter.
Both Aurora and Nova are among the top 10 of most searched girls' names, while for boys, the top three were Braxton, Zion and Hunter
MOST SEARCHED FOR GIRLS' AND BOYS' NAMES ON THE BUMP WEBSITE Boys Girls 1. Braxton 1. Mila 2. Zion 2. Aaliyah 3. Hunter 3. Aurora 4. Kai 4. Aria 5. Urban 5. Amelia 6. Logan 6. Eliana 7. Elliot 7. Nova 8. Liam 8. Kayden 9. Lucas 9. Molly 10. River 10. Ivy 11. Atlas 11. Avery 12. Asher 12. Rowan 13. Zane 13. Mia 14. Remi 14. Skylar 15. Luca 15. Maeve 16. Hayden 16. Arabella 17. Ethan 17. Arlo 18. Quinn 18. Riley 19. Landon 19. Alyssa 20. Mateo 20. Ava 21. Harper 21. Luna 22. Atticus 22. Thea 23. Xavier 23. Olivia 24. Ezra 24. Alaina 25. Leo 25. Louise 26. Grayson 26. Asa 27. Noah 27. Emma 28. Levi 28. Charlotte 29. Hudson 29. Amaya 30. Alexander 30. Mya 31. Josiah 31. Ayla 32. Shia 32. Isabella 33. Reese 33. Millie 34. Austin 34. Rhea 35. Axel 35. Adriel 36. Evan 36. Sophia 37. Remington 37. Amara 38. Elijah 38. Reese 39. Oliver 39. Adeline 40. Adonis 40. Delilah 41. Ace 41. Alana 42. Kian 42. Abigail 43. Caleb 43. Nora 44. Rhys 44. Malia 45. Lennox 45. Elaine 46. Cairo 46. Saoirse 47. Theodore 47. Chloe 48. Aaron 48. Dior 49. August 49. Zoey 50. Wyatt 50. Grace 51. Zayne 51. Tiana 52. Milo 52. Penelope 53. Sebastian 53. Ella 54. Amir 54. Genevieve 55. Armani 55. Layla 56. Benjamin 56. Madison 57. Roman 57. Ximena 58. Owen 58. Isla 59. Jace 59. Adelyn 60. Maverick 60. Willow 61. Henry 61. Alina 62. Wren 62. Armani 63. Azariah 63. Ariana 64. Arden 64. Jaylen 65. Ryan 65. Audrey 66. Enzo 66. Brielle 67. Finn 67. Hannah 68. William 68. Jayden 69. Elian 69. Stella 70. Silas 70. Athena 71. Keanu 71. Leilani 72. Ronan 72. Naomi 73. Jacob 73. Savannah 74. Michael 74. Bella 75. Kye 75. Yara 76. Matthew 76. Scarlett 77. Sawyer 77. Lyla 78. Miles 78. Aurelia 79. Elias 79. Josie 80. Raiden 80. Lily 81. Jaxon 81. Gigi 82. Andrew 82. Veda 83. Zavier 83. Skyla 84. Samuel 84. Octavia 85. Anthony 85. Maya 86. Marcus 86. Eleanor 87. Arian 87. Nevaeh 88. Malachi 88. Gianna 89. Micah 89. Ellie 90. Everett 90. Penny 91. Simba 91. Nia 92. Carter 92. Adaline 93. Arthur 93. Adalyn 94. Kylan 94. Anastasia 95. James 95. Azalea 96. Khari 96. Alice 97. Ryker 97. Rylee 98. Jasper 98. Leah 99. Archer 99. Zia 100. Emerson 100. CoronaAppearing on both lists was the unisex name Reese - coming in at 38 on the girls' and 33 on the boys'.
The rest of the top ten for girls was Aria at number four, followed by Amelia, Eliana, Nova, Kayden, Molly and Ivy.
For boys, the fourth most searched for name was Kai, followed by Urban, Logan, Elliot, Liam, Lucas and River.
Earlier this year, Luna and Milo were revealed as the two most popular baby names of 2020 so far, according to US website Nameberry.
It is thought the popularity of Aurora is inspired by Disney's Sleeping Beauty, while Luna - which comes in at 21 on the girls' list - is the name chosen by singer John Legend and his wife Chrissy Teigen for their daughter.
It is thought the popularity of Aurora is inspired by Disney's Sleeping Beauty
However, despite the prominence of Hunter and Aurora in the list searched for by parents, both names were recently revealed to be among those which UK parents most regret giving their children.
A survey released earlier this month by Gigacalculator.Com found that 32 per cent of parents regretted choosing the name Hunter for their baby sons.
In 2018, 1,410 babies were given that name by British parents.
Similarly, 35 per cent of parents regretted naming their baby girls Aurora, which was given to 752 youngsters in 2018.
Carter, Jaxon, Jasper, Arabella and Lyla were also sources of regret, even though they too featured on the top 100 list of most searched boys' and girls' names.
AdvertisementIntel: Returning To A Corona Discount
I don't often write specifically on Intel (INTC), despite buying the company from time to time when I see it as fairly valued or slightly undervalued. When the company suffered yesterday as though its business was in serious danger, however, it warrants a closer look to see just what we have to consider going forward in the long term.
Exposure-wise, my Intel position is comparatively modest. Broadcom (AVGO) is my largest position in the semiconductor industry, coming in at nearly 3.5% of my portfolio - Intel is well below 1% at this time.
However, after reviewing the numbers and forecasts, I decided to essentially double down on my position, with the potential for adding more if it drops further.
Let me show you why I did so, and why I think you should as well.
Let's quickly recap the company here, as news like these has a tendency to make investors - including myself - focus entirely on the quarterly-specific trends as opposed to what the company is and does.
Intel Corporation is the world's largest and highly-valued semiconductor manufacturer in terms of revenue (though perhaps this may be subject to change going forward), incorporated in Delaware. Its main business is the researching/developing and supplying of microprocessor chips to Apple (AAPL), Lenovo (OTCPK:LNVGY), Dell (DELL) and HP (HPE), among others. It also manufactures critical components such as controllers, chipsets, integrated circuits, flash memory, graphics chips, and embedded processors.
53% of Intel's 2018 sales continued to be focused on desktop and notebook computer components, but this has steadily been declining (including in 2019) in favor of tablet and smartphone chips. The remaining 47% of sales originate in flash memory chips for storage, IoT applications and data center processing products.
(Source: Intel 2019 Investor's Meeting)
While some investors may expect Intel to primarily be in the business of desktop and notebook processors, over 50% of the company's operating profits originate in its data center business segment. Intel's strategy is for the data center business to account for over 70% of company profits going forward.
As a semiconductor company, we can expect and see incredible amounts of CapEx, with a single plant costing $5B and upward, set only to increase as we move forward. This means that for new entrants to even consider challenging Intel or any of the companies with fab plants requires an insane amount of funding/capital. Operating this business also requires a ridiculous amount of continual R&D, with around 20% per year of sales being spent on R&D. Since 2005, Intel has spent nearly $200B on this.
Traditionally, this has meant that Intel has been able to introduce the next generation of microprocessor chips every 2-4 years - and this has enabled them to stay ahead of competitors which due to lacking funds or capital have no chance to keep up with the company's pace. The latest data center chips, for instance, have a performance that means 25% lower operating costs for server chips, and 65% lower operating costs for storage chips.
So while graphs like these may seem ominous...
(Source: CPUmark.Net)
...It's important to remember that this is part of a conscious strategy on the part of Intel, where the company will be, and is, focusing on other things such as Laptops...
(Source: CPUmark.Net)
..And most importantly of all, servers.
(Source: CPUmark.Net)
The degree to which AMD cannot touch Intel when it comes to Server chips reaches, as you can see, is of nearly ridiculous proportions. Intel has chosen to address the slowdown in the PC market by focusing on servers, and given the company's trends in operating profit, this has actually worked out well.
However, all of these positive things don't mean that there aren't risks out there for Intel, and these are the things I want to address here. While 2Q20 came in a beat in terms of revenue and EPS, and data center performance (which is the company's forward-looking focus) was superb, there is the potential for a much worse repetition of what has already happened to Intel once before.
(Source: Intel 2Q20 Presentation)
Back in 2018 Intel struggled to deliver 14 nm chips, which allowed AMD (NASDAQ:AMD) to take market share from the company. This also came with a delay in the 10 nm production to late 2019, which further worsened the issue. The impact of such delays is massive, as this specific one allowed AMD to move to a 65% CPU market share during late 2018 (Source: Mindfactory). The problem here wasn't price or performance, or that AMD's products were better. It was a simple fact that Intel was unable to supply product (or "widgets") - and this is a serious and fundamental issue.
I think investors in Intel need to be realistic about the following things.
1.) Intel has benefitted for a long time from the swift adoption of computers and computing technology around the world. But as the way computers are being adopted changes, Intel can no longer rely on the traditional growth drivers which allowed a 20-year average 21% dividend growth. Intel has to rely on different growth drivers, which may not allow for the same type of EPS growth.
2.) Intel's desktop-based computing products will continue to face secular decline - both because this is what the company plans to transition to more data-center driven earnings, but also because competitors can likely offer cheaper products.
3.) Competitors with financial muscles may indeed work to design their own chips, such as Amazon (AMZN). While the required capital investments for such a venture would be nigh-unthinkable, Amazon and similar-style tech companies are one of the few players likely able to make such a move.
However, at the same time, I want to give a few messages to the bears on Intel, which likely currently abound. These are my points.
1.) Intel is the biggest player on the market by far. Its chips are in over 80% of the global servers, in a $16B+ and growing server market that powers almost every piece of commercial software out there, and most legacy applications out there. When new computers or products are developed, there is little incentive to switch from Intel, if the new generation is better than the former. To say that Intel as a company is in fundamental danger because of this in the short-to-medium term is nothing short of laughable, as I see it.
2.) People are underestimating Intel's foray into IoT and FPGAs, a flexible type of processor used in newer-type data centers - where Intel gained expertise through the M&A of Altera in 2015. Furthermore, Intel acquired Mobileye for $15.3B in 2017 and investors seem prone to underestimating the company's foray into autonomous vehicles as well. Simply put, Intel has worked over the last decade to increase its addressable market significantly.
(Source: Intel Investor presentation 2019)
3. Combine all of these things with cost-cutting efforts from management, and Intel is, despite these things, likely to remain an excellent company worthy of investment going forward.
So, the message the market wants to send to Intel following the earnings report is that EPS and revenue beats aren't enough when the company is in danger of revisiting a fundamental issue from 2018. This message, I agree with. What I don't necessarily agree with (but am very pleased about) is the degree of reaction to this news.
The market is ignoring Intel's fundamental strengths -
(Source: Intel 2Q20 Presentation)
the fact that the company continues to lower debt, invest in CapEx and dividends/buybacks 
(Source: Intel 2Q20 Presentation)
as well as ignoring excellent performance in data centers, nearly doubling operating income, as well as ignoring FY20 outlooks of 4% YoY revenue growth, stable margins, and EPS, and focusing perhaps to a detrimental level on the one thing that's currently not working.
Let's see how that has impacted company valuation.
Intel - What is the valuation?I've previously been careful about Intel, as valuations outside of corona have offered meager potential returns of either below or close to 10% annually. However, things have changed, and the company's valuation is closer to the levels where I bought the lion's share of my original position in the company. This changes the potential upside.
(Source: F.A.S.T. Graphs)
While the challenges faced due to 7nm delay are in no way insignificant or small, the market is, as I see it, completely and utterly discounting Intel's areas of strength and the already-existing market penetration in areas where competitors have little potential to compete in the short-to-medium term. This is also currently expressed through the company's EPS expectations - the company's valuation has disconnected further from these expectations for that one reason alone.
(Source: F.A.S.T. Graphs)
That means even if we only expect return in the longer term to normal valuations of ~12 times earnings, this would now yield a market-beating near 10-11% annual rate of return - which is a great deal better than the 5-6% it was only a few days ago. If we consider Intel's historical discount (The company typically trades at a 13 P/E ratio based on a 10-year period), the potential upside for such a return is closer to 16% annually.
A word or two on fundamental quality, for those not aware of it. Intel is A+ rated, now a 28.4% undervalued (based on a $65/share long-term price target, which equates to around the historical discount for the company) business with a "Very Safe" dividend. It has a "Wide" moat, a 16% 5-year dividend growth ratio, and a payout ratio of only 27% of LTM EPS. While we can't expect much growth over the next few years as Intel's performance seems to be headed for troughing margins and multiples in some ways, we can expect for the company to maintain its performance (somewhat flat). At an improved yield of ~2.6%, that isn't just good - it's excellent. Intel is the highest-rated IT/semi-stock I follow, coming in at a 3.3/4.3, with only Oracle (ORCL) being close to the same quality score.
While FactSet analysts cannot be considered accurate when it comes to Intel, their lack of accuracy usually comes as a positive surprise, as they tend to fundamentally underestimate Intel.
(Source: F.A.S.T. Graphs)
In some respects, Intel isn't exactly "cheap." Sales multiples aren't all that favorable when considered to the broader market, but we must remember that in the technology sector, we suffer from an excess of inflated valuation multiples across the board. A company that, like Intel, is only what I see as "slightly" inflated must still in today's market be seen from a positive light.
Many tech stocks, including its peers, are currently priced for such a degree of operational perfection that I believe they will not ultimately attain. Intel, at a 10-12 P/E ratio is priced for "normal" growth - or even below it.
They are integrated in things that many investors do not even realize, and the comparison to AMD is one that needs to be made with a consciousness of the scale of the operations - closer to $100B in revenues for Intel, with closer to $10B in revenue for AMD.
When it comes to valuations in the tech/IT sector, I'm typically extremely leery of what I invest in - everything seems, and is indeed, fundamentally overvalued. Intel was sort of an exception before this. It was a definite exception when I bought my initial shares in 2018/before.
And it has become an exception once again.
This forms the basis of my current Intel thesis.
ThesisThe thesis is this.
While the company's failure to step up 7nm production/planning has resulted in headwinds and potential issues that should not be underestimated, it is a critical mistake to underestimate Intel's entire business stream and profitability based on this singular fact.
The last time the market did this and the last time the potential for Intel's margins was as poor as some suggest was back in -09. Had you invested in Intel coming out of the dot-com bubble at a then-15X P/E, your money, even with the drop yesterday, would have been more than doubled at a 289.9% total rate of return. Before the drop, which I believe we are likely to rebound from to some degree, that rate of return was 367%, from investing in the largest chip manufacturer in the world.
Intel as an investment is one that should be considered in the long term. It can provide long-term capital appreciation and competitive dividends if done correctly, and I see this as an opportunity to do just that - to invest more.
Therefore, I consider Intel Corporation a "Buy" with a 28% undervaluation as of Friday's close. While there are risks, I believe for the bears to overestimate the impact that this will have long term, and I believe investors should consider more carefully where Intel is actually working - because most, if not all, of that is working.
Thank you for reading.
StanceIntel is a "Buy" with a 28% undervaluation as of the market drop due to the company's failure in 7nm delivery.
Disclosure: I am/we are long INTC, ORCL, AVGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment.
I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles.
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