Investors eagerly await Tuesday's 1Q earnings reports from chipmakers Intel and Texas Instruments.
April 14, 2003: 12:56 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer
NEW YORK (CNN/Money) - Bust out the onion dip. Two of the most important chip companies are on tap to report their first-quarter earnings on Tuesday: Intel and Texas Instruments.
A rebound in the semiconductor industry is seen as vital to the health of the overall technology sector since chips are among the most crucial components in computers, cell phones and other electronic devices. However, expectations for the first quarter are relatively low.
"I'm not looking for either company to knock the cover off the ball," said Ted Parrish, co-manager of the Henssler Equity fund, which owns both stocks. "But the first quarter is sort of a moot point."
Intel has already issued a sales warning. Analysts expect the company to post $6.7 billion in sales, down 1 percent from last year, and earnings of 12 cents a share. Intel earned 15 cents a share a year ago.
Two other large semiconductor companies -- STMicroelectronics (STM: Research, Estimates) and Microchip Technology (MCHP: Research, Estimates) -- also issued first-quarter earnings warnings this month.
Texas Instruments is expected to have a better quarter, however, with an earnings estimate of 6 cents a share, compared with a penny a share a year ago, and sales of $2.1 billion, up from $1.8 billion.
Sales estimates might be too high
The key will be what Intel, Texas Instruments and other chip companies say about the second quarter and beyond. Now that the war in Iraq appears to be nearing a conclusion, will corporations finally start spending on tech again? Investors seem to be betting that will be the case.
Shares of Intel (INTC: Research, Estimates) are up more than 8 percent year-to-date, making the stock the third-best performer in the Dow Jones industrial average. Texas Instruments (TXN: Research, Estimates) is also up 8 percent this year. And the Philadelphia Semiconductor Index, which includes 17 major chip and chip equipment companies, is up 3 percent year-to-date and nearly 40 percent from its early October lows.
Still, money managers think that analysts' estimates are too high on the sales side.
"There's a good chance that Intel will have to guide down on revenues," said Alex Vallecillo, senior portfolio manager with National City Investment Management, subadvisor for the Armada family of mutual funds. "Seasonality is not being reflected in current estimates." National City owns shares of Intel and Texas Instruments in some of its funds.
Typically, second-quarter sales are about 3 percent lower than the first quarter, said Aziz Hamzaogullari, a senior analyst with mutual fund firm Evergreen Investments. But analysts are expecting sales to drop just 1 percent, from $6.7 billion in the first quarter to $6.6 billion.
Hamzaogullari said a more reasonable second-quarter estimate is for revenues to be flat to down as much as 5 percent from the first quarter, which would be a range of about $6.4 billion to $6.7 billion. Evergreen owns shares of Intel and Texas Instruments in several of its funds.
Focus on wireless
Specifically, it will be interesting to see how well Intel's new chip for wireless laptops, known as the Centrino, is doing. The company launched Centrino on March 12 with a $300 million ad campaign.
Most major PC manufacturers have begun to sell notebooks with Centrino. Hamzaogullari said that the early buzz on Centrino is that it is doing well, which could help offset some of the weakness in its flash memory chip business.
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Intel blamed weak sales of flash memory, a key component of cell phones and other wireless devices, for last month's sales warning.
The health of the cell phone market is key for Texas Instruments as well. And weakness in this market was one reason why Adam Parker, a semiconductor analyst with Bernstein, wrote in a report on Monday that he thinks second-quarter sales estimates for Texas Instruments are too high. The Wall Street consensus is $2.3 billion. He is predicting sales of $2.2 billion.
More cap-ex cuts?
In addition to fundamentals, investors will be keeping an eye on any changes to these two companies' capital spending plans.
When Intel reported its fourth-quarter results, the company disclosed that its capital expenditures for 2003 could be as much as 25 percent lower than in 2002. That news sent shares of semiconductor equipment companies that sell to Intel skittering and reaffirmed fears that demand is still tepid for chips.
During its fourth-quarter report, TI said it expected to spend the same amount on capital expenditures in 2003 as it did in 2002.
Vallecillo said that Intel should continue to lower its capital spending in order to increase the gross profit margin, which is expected to come in at under 50 percent for the first quarter. The gross margin measures how much profit a company is wringing from sales before operating expenses. Intel's was 51 percent in last year's first quarter.
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