Intel: Cut Spending, Says Goldman; Intel Knows What to Do, Says Oakmark

Shares of Intel (INTC) are up 9 cents, or 0.6%, at $21.86, as Goldman Sachs’s James Covello offers a suggestion: cut capital expenditures.

Covello, who has a Sell rating on Intel shares, and a $16 price target, thinks a 3% climb in the shares through yesterday was all about investors expecting Intel would cut some of the $13.5 billion in spending it has planned for this year. After spending 100% of operating cash flow in seven of the last eight quarters, on capital spending, on dividends, and on share repurchases, net cash fell from $20 billion to $5 billion from Q4 of 2010 through Q4 of last year.

Covello thinks PC inventories are too high, and that Intel has been unnecessarily contributing to that inventory build-up:

If Intel were to significantly reduce capex to about $7-$8 bn, then we would likely be less negative on the stock. As we have written previously, the primary reason for our Sell rating is our view that Intel�s robust capex has created excess supply. For example, Intel�s 4Q12 fab utilization was about 50%, and PC OEM inventory is near a multi-year high (Exhibit 2). We do not believe a small capex reduction would be sufficient to fix the supply problem, as Intel already added significant capacity with its capex increase to $11 bn in 2011 and 2012 from about $5 bn on average in 2007-2010. In addition, our hardware team expects 2013 PC units to decline slightly yoy.

The equipment makers wouldn’t be hurt too much, Covello thinks, by a cut in spend by Intel, given “Intel’s orders to the SPE companies are currently very low and this is unlikely to change that.”

“In fact, we believe one reason investors expect a capex cut is due to comments from the supply chain on low logic orders.”

Covello models Intel making $53.4 billion in revenue this year and $1.65 in GAAP EPS. That is below consensus of $53.8 billion and $1.93.

Update: Bill Nygren of The Oakmark Funds was on CNBC‘s “Half Time” a short while ago. When asked by CNBC’s Pete Najarian about whether he agreed with Goldman on the capex point, Nygren made clear he did not: “One of the reasons we own Intel is that we trust them to come up with the right number for capital expenditures to best maximum value for shareholders.”

Added Nygren, “You’ve got a dividend yield on intel that’s not much below Italian bonds, and I think Intel is safer.”