Wednesday, October 18, 2006

Color on quarter: Intel (NASDAQ:INTC)

Analysts are mostly positive on Intel (NASDAQ:INTC) after the co issued its Q3 report last night:

- Merrill Lynch notes that for once, Intel delivered results that were largely in line with their expectations. On the positive side, the ramp of new products is proceeding as they thought. Product mix is still improving, reductions in operating cost are significant, and market share losses should reverse in the desktop and mobile markets. On the negative side, share losses in server processors are likely to continue, and manufacturing capacity appears excessive.

Intel's management has effectively capped the stock price for the short term by refusing to discuss business recovery plans in any detail beyond the current quarter. That said, the factors that have propelled the stock to $21 during the past few months are still in place. It's not reasonable to expect much multiple expansion from Intel, but they think the street is still underestimating earnings potential for 2007. At $1.30 in forecasted earnings the stock would still be at less than 20x earnings at $25. Firm continues to be buyers of the stock.

One important point for investors trying to understand the likely trajectory of market share in 2007 is it's the product that matters. The reality is that Intel has highly competitive 65nm products in both the desktop and notebook markets while AMD will only just be getting ready to ship 65nm late this year or early next. That's what matters, and that's what should be reflected in PC OEM comments and processor market share as we move through 2007.

- JP Morgan notes gross margins declining during 1H07E, reiterate Neutral. While they are
positive on capex cuts, restructuring and better products, they remain Neutral on INTC due to belief that gross margins should decline to the high-40% range during 1H07 due to record inventory, higher start up costs, and higher depreciation. As soon as the firm believes gross margins are close to bottoming, their outlook on INTC could become more optimistic.

Raising estimates, but below Consensus. Firm is raising their C06 revenue and EPS estimates from $35.0 billion and $0.74 to $35.1 billion and $0.82. They are maintaining C07 revenue estimate of $37.0 billion but raisingC07 EPS estimate from $0.94 to $1.05, below Consensus of $1.10.

INTC is trading at 3.5X C06E sales, below the mid-point of a historical range of 3.0X-5.0X sales. JP Morgan remains Neutral due to belief in risk of estimate cuts driven by lower gross margins.

- Goldman Sachs notes that while inventory levels remain high and the report likely didn't meet heightened expectations, they believe the results underscore that the company is better positioned entering 2007 than it was entering 2006, both in terms of its competitive positioning and its cost structure. Management also appears to be taking a disciplined approach to capex, announcing its 3rd cut to the budget this year. While the firm expects margins to continue to improve as a result of these actions, they believe the stock is already reflecting this improvement as it is trading at 21x estimated normalized EPS of ~$1.00. They therefore do not recommend the name to absolute return investors, although they recommend Intel on a relative basis versus AMD given expectation of share gains. The firm is raising their FY2007 EPS estimate to $1.10 from $0.90 as they are now modeling in the restructuring. Maintains 12-month price target of $22.

Notablecalls: Note that Goldman downgraded the stock yesterday. I continue to be negative on INTC as I see no quick fixes to their problems. The historically high margins are not likely to return. Plus there is no real growth. Just a commodity business.

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