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Intel: CEO Transition Likely To Challenge Stock

 November 21, 2012 03:19 PM

Intel Corp. (NASDAQ: INTC) announced that Paul Otellini will be retiring as President and CEO in May, initiating a transition to occur over the next 6 months. Both internal and outside replacement candidates will be considered.

History would indicate internal candidates with a technical semiconductor background where Paul Otellini was the exception, will be considered – the most promising being Brian Krzanich and Dadi Perlmutter.

The transition comes at a time when Intel understands that it can leverage all of its strengths as a leader in computing to lead in the transition to mobile processors for smartphones/tablets, it has been unable to capitalize on it to date.

[Related -Advanced Micro Devices, Inc. (AMD) Reports Today: The Game's Afoot]

"We believe the raised uncertainty during this transition period is likely to challenge the stock, especially as there are a limited number of candidates, especially from the outside, who are both visionary leaders and have the deep industry experience to lead Intel through what is likely to be a period of increasing competitive intensity," UBS analyst Steven Eliscu said in a client note.

Let's take a look how stocks reacted subsequently to the announcement of a CEO transition and actual change in leadership:

Shares of Intel fell as much as 4 percent since the announcement. On Wednesday, it fell 1 percent to $19.23. It has a P/E ratio of about 8 times.

Advanced Micro Devices, Inc. (NYSE: AMD): CEO, Dirk Meyer, who resigned on Jan. 10, 2011, was succeeded by interim CFO Thomas Seifert and then by current CEO Rory Read on Aug. 25, 2011.

[Related -SanDisk Corporation (SNDK) Q4 Earnings Preview: What To Watch?]

In the case of AMD, subsequent to Dirk Meyer's resignation, the valuation has declined, with its share price and EV/sales down by more than 50 percent since Rory Read assumed CEO responsibilities.

Maxim Integrated Products, Inc. (NASDAQ: MXIM): CEO, Jack Gifford, who retired, was succeeded by Tunc Doluca on Jan. 1, 2007. 

SanDisk Corp. (NASDAQ: SNDK) CEO, Eli Harari, who retired, was succeeded by Sanjay Mehrotra on Jan. 1, 2011.

"Maxim and SanDisk show flat to down share price performance and multiple compression during the first year of their respective new CEOs, although SanDisk's valuation was likely more impacted by NAND industry supply- demand dynamics than the CEO transition," Eliscu noted.

Broadcom Corp. (NASDAQ: BRCM): CEO, Henry Nicholas, who resigned January 23 2003, was succeeded by interim CEO, Lanny Ross and then by current CEO, Scott McGregor on October 26, 2004.

Broadcom showed very strong performance during much of the interim CEO period, although this occurred in conjunction with an industry up-cycle in 2003- 04. For the first year of Scott McGregor's role as CEO, the stock price recovered from the 2004 industry downturn, with its P/E multiple holding steady.

The performance of some stocks outside of semiconductors but still within tech.

Hewlett-Packard Co. (NYSE: HPQ): CEO Mark Hurd, who resigned Aug. 6, 2010, was succeeded by interim CEO, Cathie Lesjak and then by Leo Apotheker on Sept. 30, 2010. On Sept. 22, 2011, the HP replaced Apotheker with fellow board member and former eBay chief Meg Whitman.

Shares of HP fell 48 percent since the last CEO transition and 71 percent since the departure of Mark Hurd, who was considered as one of the most successful CEO's until he had been forced to resign in August 2010 after an embarrassing sexual harassment probe. Its price-to-earnings also fell from 10.5 times during the tenure of Hurd to the current 4.5 times.

Apple, Inc. (NASDAQ: AAPL): CEO, Steve Jobs was succeeded by Tim Cook on Aug. 24, 2011. Apple shares gained 49 percent since Cook took the mantle, and its P/E ratio has been intact at 12 times.

"While there is limited commonality among Intel, HP and Apple other than being large-cap tech companies, it is instructive to see the divergence – from the challenges at HP to the relative success at Apple, albeit its P/E multiple has more recently compressed," the analyst said.

Even outside of tech, Procter & Gamble (NYSE: PG), where A.G. Lafley was succeeded by Robert McDonald on July 1, 2009 and Ford, where Bill Ford was succeeded by Alan Mulally on Sept. 5, 2006. P&G's stock performed well initially and then remained range-bound while Ford's share price valuation and multiple did not change much during the first year, even while Ford Motor Co. (NYSE: F) ultimately proved to be a notable turnaround story.



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