SOURCE:  Parish & Company.

Intel Recognized as Outstanding Global Citizen, Warning Issued on Stock

PORTLAND, Ore.   Today Parish & Company formally recognizes the Intel Corporation as an Outstanding Global Corporate Citizen.  This is the second time this award has been granted in five years.  The first recipient was the Sprint Corporation.

Intel has significant manufacturing facilities in Ireland, Israel, Malaysia, Costa Rica and many other parts of the world.  They also provide extraordinary opportunities for employees who demonstrate achievement.  Whether you are from MIT or Portland Community College makes little difference after a year on staff at Intel.  Achievement matters and is rewarded.

One can easily forget how valuable good jobs are, whether in Portland, Oregon or San Juan, Costa Rica and how they can help resolve a multitude of social problems.  Intel has also been a breeding ground for spin offs and other start-ups due to the excellent training employees receive at the company.

While most people believe that the Microsoft Corporation is leading the technology industry, Parish & Company sees Intel as the quiet leader and Microsoft riding its coattails.

In conducting this review, Parish & Company identified four areas of potential improvement for Intel.  Three of these areas are specific to Intel's financial practices and should be considered by all investors:

1)  SERP Profit Sharing Plan -  This is a supplement to the company 401K and for many employees now represents the majority of their retirement balance.  Remarkably, employees have no discretion over how these funds are invested.  Whether you are a 22 year old recent graduate or 45 years old with 20 years of experience at Intel, 100 percent of these funds are invested in an "enhanced" S&P 500 index fund.

To Intel's credit, less than 2 percent of this balance is Intel stock.  Still, however, one of the lessons of Enron is to make sure that employees have a secure place to put their retirement funds if they desire to choose less risk.  Watching their retirement fluctuate with the S&P 500, especially for those with 20 years of experience, is most unfortunate.

Parish & Company made a four month effort to effect such a change yet was unsuccessful.  This included recommending a Treasury based fund as a second alternative for employees with more than 10 years of service to supplement the existing S&P 500 fund.

2)  Shares Outstanding, Including Options, Exceed 7.3 billion -  Intel's gross annual revenues of $28 billion represent roughly $4 per share and this makes the stock highly leveraged.  Every $1 change in the stock price now changes the market value by $7.3 billion.

Clearly, Intel should be more cautious about stock splits in the future in order to prevent the risk of creating a "watered stock."  An aggressive buyback program in the event of a significant drop in the stock price, for example below $10 per share,  should also be considered.

The company might also benefit by focusing more on other advantages of employment at Intel beyond the stock options.  This would help emphasize Intel's core strength as an excellent employer dedicated to its employees.

3)  Pro Forma Earnings Releases - Intel now regularly reports "pro forma" earnings which are coming under increasing scrutiny by the SEC.  As a leader, Intel might consider reporting net earnings per generally accepted accounting guidelines of GAAP as recommended by the SEC.

Pro forma results at Intel are now grossly overstating their true underlying earnings.   This could cause public perception problems for Intel in the future, especially given that top management and directors are now aggressively selling shares.  These sellers include David Pottruck, CEO of Charles Schwab, who sits on Intel's board and has made millions selling shares awarded as stock options.  One might even argue that this is a conflict of interest given that Intel is one of Schwab's most actively traded issues.

4) Microsoft Passport Controversy -  It is true that most consumers no longer trust Microsoft and that is probably natural given their well documented business practices.  This has resulted in a serious impediment to growth in the PC industry.

What Intel might consider is developing a rival service to Passport that includes all the protections inherent with financial services accounts at a traditional bank.  Such a proposal was made by Parish & Company to Intel in 1999 and specifically presented as a "vaulting" strategy utilizing local encryption and direct access through Intel's website at www.intel.com

Intel seems to be more focused on data management and traditional storage solutions and might benefit greatly from such a strategy, as would the Microsoft Corporation from an increased ability to sell software.

Parish & Company is an independent fee based investment advisor to individuals, pensions and trusts based in Portland, Oregon.  No fees are accepted, either directly or indirectly, from any provider of investment products.  Your comments are most appreciated and please do visit my research archive at www.billparish.com.