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Could Intel’s Capital Spending in Fiscal 4Q15 Bear Fruit?

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Jan. 14 2016, Updated 12:06 p.m. ET

4Q15 highlights

So far, we saw that Intel (INTC) is expected to report a slight growth in revenue in fiscal 4Q15. New product launches in the PC and IoT (Internet of Things) space are expected to push revenue upward in these areas. Let’s now look at some other announcements by Intel over the fourth quarter and their likely impact on earnings.

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Completion of Altera acquisition

On December 28, 2015, Intel announced the completion of Altera’s merger. This will see an addition of $7 billion of new debt in the fiscal 2015 balance sheet and a zero net cash balance for fiscal 4Q15. Net cash balance means Intel has $20 billion of cash to meet its $20 billion of debt.

N. Quinn Bolton, a Needham analyst, expects Altera to add $2 billion to Intel’s revenue in fiscal 2016. The fiscal 2016 earnings will see the addition of the PSG (programmable solutions group), a whole new business segment that will be managed by Altera. The group will work along with the data center, IoT (Internet of Things), and memory group to integrate its FPGA (field-programmable gate array) in Intel’s chips.

The year 2016 will see more such integration as 2015 witnessed the announcement of some of the biggest mergers. Avago (AVGO) intends to incorporate Broadcom (BRCM) into its earnings, and NXP Semiconductors (NXPI) intends to incorporate Freescale.

R&D and M&A

In Intel’s guidance for fiscal 4Q15, the company stated that it expects to spend $5 billion on R&D (research and development and M&A (merger and acquisition), similar to the amount spent in fiscal 4Q14. Some of this amount has been spent in the following areas:

  • In September 2015, the company announced plans to invest $50 million in quantum computing.
  • In the same month, Intel Capital announced plans to invest $67 million in eight Chinese startups.
  • In October 2015, Intel announced plans to invest $60 million in Yuneec, a Chinese drone maker.
  • Intel agreed to acquire German drone maker Ascending Technologies on January 6, 2016, for an undisclosed sum.

These investments, if successful, would bear fruit in the long term.

In the last part of the series, we’ll discuss the valuation metrics that determine a stock’s earnings capacity. The Technology Select Sector SPDR Fund (XLK) has ~10% exposure in the semiconductor industry. It invests 3.1% of its portfolio in INTC.

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