Intel: Time for the chip count

[notiCIas]

Intel: Time for the chip count

Pressure's on the No. 1 semi co. to report a strong 2Q but Wall Street is confident it can deliver.

July 18, 2005: 12:26 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) – What a difference a year makes for Intel.

Last year, concerns about a buildup in inventory and the delayed launch of new chips due to production snafus plagued the company. As a result, shares of Intel plunged nearly 27 percent in 2004. It was the second worst performer in the Dow Jones Industrial Average, trailing only Merck.

But so far, 2005 has been a year of redemption for the world's largest maker of semiconductors used in personal computers and servers. Intel reported a better than expected first quarter in April and raised its sales guidance for the second quarter last month. Shares are up 22 percent, making it the Dow's second-best performer.

The pressure will be on Intel (Research) to report solid second-quarter results on Tuesday afternoon. According to estimates from Thomson/First Call, analysts expect Intel to report earnings of 32 cents per share, up 20 percent from year ago, and sales of $9.22 billion, a 15 percent increase from the same period last year.

Intel's leading rival in the microprocessor market, Advanced Micro Devices (Research), posted stronger than expected sales and a surprise profit last week. The much smaller AMD, which recently filed an antitrust complaint against Intel, appears to have gained some market share following Intel's difficulties last year.

Boom times are here again?
Intel's fans think production problems are a thing of the past and that the company should continue to capitalize on strong sales for chips used in wireless notebook computers, a product that features higher profit margins than semiconductors for desktops.

"We're attracted to the consistency of execution that's become evident in the past six to nine months after a number of stumbles and disappointments in 2004," said Richard Skaggs, co-manager of the Loomis Sayles Growth fund, which owns shares of Intel. "Laptop demand is very strong and Intel is well-positioned there."

Analysts say that AMD's results show that demand appears to be picking up for more than just notebook computers. In addition, it looks like corporations, rather than just consumers, are spending more on hardware, which bodes well for Intel.

"There was an assumption at the beginning of June that second-quarter sales of desktops and servers would be lethargic but momentum has built throughout the quarter," said Cody Acree, an analyst with Legg Mason. "There were concerns that there would be lackluster spending by consumers and corporations because of high oil prices but it looks like things were probably normal or even better than normal."

With this in mind, Wall Street would probably not be content if Intel merely hit its second-quarter targets. "All indications that we've heard suggest that Intel has a good shot of reaching the upper end of its revenue guidance," said Skaggs. The company said in June that sales should be between $9.1 billion and $9.3 billion.

Richard Whittington, an analyst with Caris & Co. said that it shouldn't be too difficult for the company to post even stronger than anticipated results because it has its manufacturing operations back on track.

Whittington argues that the company's guidance is too low since the company probably wants to keep expectations from becoming unreasonable. "Intel is not consciously trying to underestimate but given the big misses of last year, they're being inherently conservative," he said.

To that end, he is predicting that Intel will report sales of $9.4 billion in the second quarter. He also thinks that gross profit margins will wind up being higher than they were in the first quarter.

The company reported gross margins of 59.3 percent in the first quarter and said in June that margins should be around 57 percent for the second quarter.

All eyes on the outlook

Investors will also be looking for a bullish outlook for the third quarter. Analysts currently are predicting that the company will post earnings per share of 36 cents and sales of $9.76 billion. Some analysts think these numbers, particularly the sales figures, are probably too low.

Acree said Intel could generate sales of $9.9 billion while Whittington thinks the company could post sales as high as $10.3 billion.

So what does this mean for the stock? It's already had a solid run this year. But analysts think that shares, trading at about 19.5 times 2005 earnings estimates, are reasonably priced, especially since there's a good chance that forecasts for 2005 and 2006 could head higher if the company posts strong second-quarter results.

"It's not out of the realm of possibility that the second-quarter numbers could be strong enough to support the stock at a higher valuation," said Acree. "If you keep raising estimates, you probably could keep expanding the multiple."

Skaggs said the stock could hit the low $30s within the next six to 12 months, up from its current level of about $28.

Whittington thinks a price of $35 is possible based on his expectation that 2006 earnings estimates will wind up increasing dramatically. The current consensus is for just $1.56 a share but he thinks Intel could post a profit of $1.85 a share next year.