Intel's swell

[notiCIas]

Intel's swell

Investors cheer strong results, guidance from world's No. 1 chipmaker. Is the worst over for tech?

April 19, 2005: 6:41 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - That whole IBM earnings miss last week seems like a distant memory for Wall Street now.

Intel, the world's largest chipmaker, reported better-than-expected first-quarter sales and earnings Tuesday and issued sales guidance for the second quarter that was in line with average Wall Street forecasts.

The news follows a similarly upbeat earnings report from fellow chipmaker Texas Instruments on Monday. Shares of Intel (Research), which rose nearly 2 percent in regular trading, surged more than 3.5 percent in after-hours trading.

The good news from Intel could ease investors' concerns about a possible tech spending slowdown, fears that were stoked when IBM said last week that it saw a drop-off in demand in March.

"This should put to sleep any bears on Intel who thought PC demand was weak," said Apjit Walia, an analyst with RBC Capital Markets. Intel is the leading supplier of chips for personal computers.

Shares of other large cap tech companies, including PC market leader Dell (Research), software giant Microsoft (Research) and even IBM (Research) rose in after-hours trading Tuesday, as did shares of Intel competitors Advanced Micro Devices (Research) and Texas Instruments (Research). Chip stocks have been hit particularly hard lately. The Philadelphia Semiconductor Index, which tracks 20 leading chip stocks, has plunged nearly 10 percent this year.
Going mobile

Outgoing Intel CEO Craig Barrett said the strong results were driven by demand for chips in mobile products, such as wireless laptops. Barrett is retiring next month and will be replaced by Intel chief operating officer Paul Otellini.

Eric Ross, analyst with ThinkEquity Partners, said healthy sales of wireless notebooks was extremely good news since chips used in these devices are more profitable than those for standard PCs and servers, the computers used to build corporate computer networks.

As a result, Intel's gross margins, a key measure of profitability, came in at 59.3 percent for the first quarter, versus the company's earlier forecast of 57 percent. And Intel said that gross margins for the year should now be 59 percent, up from its prior guidance of 58 percent.

"This is pretty positive. Intel blew away the numbers," Ross said.

The company added that it expects sales for the second quarter to come in between $8.6 billion and $9.2 billion. The midpoint is in line with Wall Street's consensus estimate of $8.9 billion. During a conference call with analysts, Otellini said that the company saw strong sales in Japan and other parts of Asia, which could reassure some who were worried about weakening global demand.

RBC's Walia said that he thinks this estimate is conservative and that it would not surprise him if Intel wound up beating the high end of its sales guidance in the second quarter, thanks to continued strength in sales of its Centrino wireless chipsets.

Intel's inventories rose slightly from the fourth quarter, to $2.8 billion. Rising inventories at Intel and other chip firms spooked many investors last year because it was taking place at the same time that demand for tech products was slowing.

But during the conference call, Intel chief financial officer said Andy Bryant said that it boosted inventory to meet worldwide demand that he called both "solid" and "real" and that investors should not be concerned.
Not all chips are equal

And in another encouraging sign, Intel said it now plans between $5.4 billion and $5.8 billion in capital spending in 2005, up from its earlier forecast of $4.9 billion to $5.3 billion in capital expenditures.

"The fact that they are raising cap-ex shows that they expect business is strong enough to support the investment.," Ross said.

Intel's new spending plans also caused a big rally in chip equipment stocks, which sell gear to semiconductor manufacturers.

Applied Materials (Research) surged more than 3 percent in after-hours trading while shares of rivals Novellus Systems (Research), KLA-Tencor (Research) and Lam Research (Research) all jumped nearly 4 percent.

But Alex Vallecillo, portfolio manager with National City Investment Management Co., which owns Intel, cautioned tech investors to not get too excited about Intel's news, saying that just as IBM's earnings miss may not have meant that tech spending was heading for a major slowdown, Intel's good news doesn't necessarily mean that happy days are here again for all tech stocks.

"In the past, we were in a cycle where a rising tide lifted all boats and when the tide receded every boat went down but we're past that," said Vallecillo. "Now you have to look at stocks on a company- by-company specific basis and can't draw conclusions from one report."

To that end, another leading chip company, Linear Technology (Research), issued sales guidance for its fiscal fourth quarter on Monday that was below analysts' expectations and its stock fell nearly 1.5 percent after hours on the news.

Another fund manager added that Intel's results, while undeniably good, could just turn out to be good news for it and a select few others in the chip sector.

"Intel is obviously a bellwether that has to be paid attention to. The numbers were quite good and more importantly the guidance was good. This should put a floor under Intel's stock," said Barry Randall, manager of the First American Technology fund, which owns shares of TI and Applied Materials. "But Intel's news doesn't change the larger picture for tech."