Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Four Ways Companies mislead Investors in earnings reporting using Intel as an example

InvestorEducation / Investing Jan 23, 2007 - 10:15 AM GMT

By: Money_and_Markets

InvestorEducation

Intel recently reported its fourth-quarter results. The headlines celebrated the fact that the semiconductor company delivered $0.26 a share in profits, beating the Wall Street consensus estimate by a penny. Everyone seems impressed … except me. In fact, all I see is a company whose business is sinking fast, and a stock that's going to get hammered.

So today I want to use Intel as an example of how companies use different tactics to convince investors that everything is better than it really is. Think about these the next time you're about to buy a stock …


Financial Fun and Games #1: Income Statement Hanky Panky
Intel's $0.26 in per-share profits were created with financial smoke and mirrors. The company actually made $0.256 a share, but thanks to the magic of rounding up, Intel was able to squeeze out an extra half a penny in profits.

That might not sound like much at first. But remember, we're talking about per-share profits. Half a penny times about six billion shares isn't exactly chump change! Plus, that rounding up was the difference between meeting Wall Street's expectations and beating them.

Intel also used $4.6 billion to repurchase 226 million shares of stock in the last year, which resulted in a reduction of the number of outstanding shares from 6.1 billion to 5.8 billion. If those 300 million shares hadn't been bought back, earnings would have been reduced by another $0.03 a share.

And let me tell you, Intel is a master of income statement manipulation. For example, the company sold off its application processor business to Marvell Technology last quarter and classified that gain as operating profits. That's extremely misleading since the sale is a one-time event. The gain increased Intel's fourth-quarter earnings by approximately $0.025 a share.

End result: Take away that rounding up, the share buybacks, and the one-time gain and Intel actually missed analysts' expectations by a nickel.

As an investor you absolutely need to look below the surface when it comes to these numbers … you can't assume that the announced earnings figure is a true representation of how much the company is making from its main businesses.

Intel - As an investor you absolutely need to look below the surface when it comes to these numbers

Financial Fun and Games #2: Balance Sheet Shenanigans
It isn't just Intel's income statement that raises my eyebrow. Take a look at the company's balance sheet …

Intel is sitting on $3.4 billion of unsold inventory, which is about the same amount it had in July. Here's the important difference — the company is now heading into what is traditionally its slowest period. Moreover, unsold inventory has ballooned by 38% from the fourth quarter a year ago.

To really put this idiotic buildup into the proper perspective, remember, sales fell 5% in the last 12 months. Listen, anytime you see a company with falling revenues and skyrocketing inventory, you are looking at a company in big trouble.

And there's more …

Intel's cash hoard is shrinking. Intel had $11.3 billion of cash and short-term investments at the beginning of the year but only has $8.8 billion now.

Can you say “burning through cash?” Be on the lookout for this kind of stuff before you invest in any company!

Financial Fun and Games #3: Talk About Tomorrow Instead of Yesterday
I don't know about you, but when I buy a stock, I want a company with rising sales and profits. Intel knows this is what investors are looking for, so it avoids making year-over-year comparisons.

Reason: If you do compare the company's fourth-quarter results to the same period a year earlier, you'll see just how bad they look …

In the fourth quarter of 2005, the company made $2.45 billion in profits. In the fourth quarter of 2006, it only made $1.5 billion. That's a 39% drop!

And the sales side isn't much better. Revenues for the fourth quarter of 2006 were $9.7 billion, down 5% from $10.2 billion a year ago.

These results, especially the shrinking sales, tell you exactly how tough the processor chip business is, and how poorly Intel is really doing.

Financial Fun and Games #4: Promise Investors That You'll Get Lean and Mean
Intel would have investors think that its restructuring plan, which includes spending and manufacturing cuts, will save $2 billion in costs and send its profits to the moon.

Now, $2 billion is indeed a lot of money, but once you look at the footnotes, you'll see how misleading that claim is — I'm talking about the phrase “exclusive of restructuring costs.”

See, Intel massively reduced its workforce. The company laid off about 8% of its workers in a year. That's not a cheap move — severance pay, training allowances, and early retirement costs will eat up most, if not all, of that $2 billion in supposed savings.

And here's my larger point: The whole concept of excluding this or that permits Intel to sweep its mistakes under the rug. Plus, it makes the company's results look way better than they really are. Heck, if I were able to exclude 50 pounds, you could call me skinny.

What This Means for Intel and Investors
All the financial fun and games are simply Intel's way of sidestepping the real problem — it's operating in a mature industry whose best days are in the past. Prices for technology items have come down, and the profit margins just aren't there anymore.

Think about it … TVs, calculators, microwave ovens, cell phones, long distance land-lines, and copiers are all industries that enjoyed gangbuster profits at one time, but eventually their glory days faded. Unless you're a hard-core Internet gaming addict, there's no reason to spend more than $1,000 on a PC anymore. Today, you can get a wonderful setup for $500 or $600.

And how much of that $500 do you think a company like Intel can hog for itself? The two-fold answer is “not much” and “a lot less than it used to get.”

If you're a long-term reader of my column, you already know that I've been singing the same song since Intel was a $60, $50, $40, and $30 stock. But let me say it one more time — I expect Intel to become a sub-$10 stock.

Fund Ticker Investment in Intel
Integrity Value IVUAX 6.8%
Van Kampen Exchange ACEHX 6.6%
Kelmoore Strategy KSOIX 5.9%
White Oak Select Growth WOGSX 5.8%
Pioneer Growth Leaders LRPSX 5.3%
IXIS Harris Focused Value NRSCX 5.1%
Sycuan U.S. Value SYCUX 5.0%
American Heritage Growth AHEGX 5.0%
Source: Morningstar

  Watch your stocks and shares Real-time with ADVFN

One other warning: Some of you may be big Intel shareholders and not even know it. I put together a list of mutual funds that have at least 5% of their portfolio invested in Intel. In my opinion, any fund with that much of its portfolio in Intel is destined to headline a future worst performers list. So don't listen to the Wall Street cheerleaders, Intel's management, or the underpaid reporters with no money to invest.

And be on the lookout for these same tactics from other companies, too. Plenty of firms are using smoke and mirrors to hide the painful truth from investors.

Best wishes,

Tony Sagami

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.MoneyandMarkets.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in