Earnings in a Slow Growth Economy

04/21/2014 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The recent earnings from this tech leader were slightly better than expected, but MoneyShow's Jim Jubak delves into the numbers to determine what it means to investors.

On April 15, 2014, Intel (INTC) reported first quarter earnings and they were a little stronger than expected. I mean, they were still down, but remember, it’s all about beating expectations, so they actually reported a penny a share better than analysts expected, but what I’m interested in is looking at Intel as an example of what’s going on in this very, very slow profit growth economy and exactly how that effects companies and they are a great example. I’ve been harping on this theme for a while.

What happens in a slow growth economy, that’s exemplified by a company like Intel, that’s a good company is, good companies look around and go, “Okay, our Core Market PC is not growing fast, in fact, it’s still showing declining growth, so we need to find someplace. We’ll need to look anywhere we can to get growth going forward.

One of the places where growth is still accelerating is in the tablet market in China. A lot of these are tablets being made by, they’re Whitebox tablets, they’re being made by Chinese companies rather than by international brands. The market here is growing and what’s particularly growing about it is that the percentage of tablets being produced in China that have built in phone functions built into the Core Processer is going to be up around 50% in 2014. This is a growth market. A couple of companies that are very well-situated for it, like Qualcomm (QUAL) and Mediatech (MEDT), have been sort of getting the lion's share of the outside of China manufacturers, but a lot of this is being done by Chinese companies producing this chips. Intel has gone into this market full-force, and what’s really interesting is, that they’ve dropped their price for their Quad processors. This is processing for tablets with phones built into a point where they’re about equal to the price that the Chinese Whitebox companies are paying Chinese companies for these processors, so there’s really no difference. The price difference between the single Core and the Quad Core chips, so that’s one Core doing the processing, as opposed to four Cores doing processing. It’s almost collapsed. It’s now just a dollar so you might as well go with the Quad Core because that’s easier to market, so until it’s clearly just like grabbing for this market at any costs, the idea that they’re making very much money is not very important. The idea is they’re going to get a big market share.

For 2014, Intel says that’s going to sell $40 million tablet CPUs. A huge number considering this was not even a name or major market for Intel going forward. Are they going to make a whole lot of money on this? No, they’re not, but they’re going to get growth out of it. They’re going to get a whole new segment that they can devote investments to. They can keep their world class and best in the world manufacturing running at full speed. They can continue to show cash flow that lets them reinvest and keep driving the size of chips down, which, again, works to their advantage because they’re one of the few companies in the world that can do this and manufacture with decent yields at that level. They’re not going to be losing money at this point. They’re not going to be making a whole lot, but in a slow growth economy, that’s what you get. You get really, really good companies willing to keep their long-term advantage in place, even if they can’t show much in the way of profit, because somewhere down the road this all works out. The economy is growing faster. They do make a profit, but, at this point, it’s like getting the revenue share of the market just anyplace you can and that means margins come down pretty much everywhere there is a profit.

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