As we dive into US reporting season, Intel (INTC US) has sparked our interest given the recent sell off, with Microchip (MCHP US) citing a slowdown in sales to China, stating “another industry correction has begun”. QMGI data offers significant insight to the electronic component market, and not all is as bad as it seems.
Despite the backdrop of global slowdown, which we espouse, semi-conductor fabricators are by-and-large witnessing fairly robust organic trends. Aggregated and currency adjusted data from across the US, European, Japanese and Taiwanese economies show that sales continue to rise at around 8.3% over Q3 2014, an almost identical rate to the prior quarter. We therefore do not foresee any disappointment on the topline level or indeed any dramatic change in outlook. Margin expansion has in our view slowed recently, primarily due to weaker export prices particularly over July & August. That said, labour costs are being contained and alongside strong operational gains should stop EBITDA margins from slowing too aggressively.
As detailed in charts 1 and 2 above, consensus for Intel’s sales and margin growth are largely in-line with QMGI’s observations. If anything, we see room for a slight miss to current consensus. Not surprisingly, given the recent sell off, the stock looks cheap, trading on 14x. Overall, sector dynamics remain favourable for electrical component manufacturers at a global level, and we see no compelling reason for repositioning prior to Intel’s results.