Wednesday, October 14, 2009

Intel (NASDAQ:INTC): Another Quarter, Another Massive Beat and Raise But Several Signs of a Peak; Reiterate Neutral

JP Morgan is making some interesting points regarding Intel's (NASDAQ:INTC) quarter:

Yesterday after the close, Intel reported 3Q09 EPS of $0.33, $0.05 above JPM estimate of $0.28 and $0.06 above Consensus of $0.27 due to higher than expected revenue and gross margins. Revenue increased 17% QoQ to $9.4 billion, well above their estimate of $8.9 billion and Consensus of $9.0 billion due to higher than expected microprocessor and chipset sales. Gross margins were 57.6%, an increase of 680 basis points QoQ and were above JPM 55.0% estimate and guidance of 53%-55% due mostly to higher than expected utilization rates.

- Margins up sharply. Intel guided 4Q09 gross margins to increase roughly 440 bps QoQ to a range of 62% plus or minus 300 basis points due to higher utilization rates, sale of written-down inventory and mix. JPM expects 4Q09 gross margins to increase by 540 basis points to 63.0%.

- Roughly seasonal 4Q09 guide. Intel expects 4Q09 revenue to increase from a range of 3% to 12% QoQ ($9.7-$10.5 billion), with a midpoint of $10.1 billion (up 8% QoQ), roughly in line with the normal seasonal increase of 9% QoQ.

- 2003 all over again. JPM notes they are getting a strong sense of "deja vu all over again" with Intel’s 2009 looking a lot like 2003 from a revenue increase and margin profile standpoint. They believe the company is outshipping demand, as evidenced by Intel getting back to peak revenue while total PC revenue should be down 20% from the peak during 4Q09.

- Several signs of a peak. Although Intel is clearly executing flawlessly, they are seeing several signs of a peak in the stock in terms of gross margins and processor unit growth well above PC unit growth. In addition, as they stated in their preview last week, there appears to be a few signs of softening in orders from the PC food chain. JPM will closely monitor Taiwan notebook demand, the hard disk drive market, and lead times during 4Q09 for signs the upturn is over.

INTC stock follows gross margins – peaking now
Although Intel beat and raised again during earnings season, the firm believes most of the upside is already in the stock due to an imminent peak in gross margins. As they have stated in their rule #7 in their "Top 10 Rules for Semi Investing", Intel’s stock follows Consensus gross margin estimates. JPM believes Intel should reach 63% gross margins during 4Q09, which is roughly one point below the 10-year peak of 63.9%.

As shown in the table below Intel’s gross margin peaks during past cycles over a 15- year period from 1993-2008 demonstrate a pattern of declining gross margin peaks as the company has ventured into non-core businesses that carry lower margins. They expect Intel's peak gross margin during the current cycle to be 63.0% in 4Q09E, just 90 basis points below its 3Q00 peak gross margin of 63.9%.

Intel units far outstripping PC units
While J.P.Morgan estimates for PC shipment growth have been recently revised upwards from -10% YoY to -0.8% YoY in C09, it appears that Intel’s microprocessor units have rapidly outgrown the recovery in PC units during 2009. If they assume Intel’s revenue increases at a normal pace during 4Q09, their proprietary chart of PC vs processor units would result in the biggest inventory build in a decade during C09. Firm would note estimated 4Q09 CPU shipments of 90.6 million units are roughly 15% above estimated PC shipments of 78.6 million units during 4Q09 which would result in an inventory build entering 1H10.

- Raising estimates. JPM is raising their C09 revenue and EPS estimates from $33.6 billion and $0.95 to $34.9 billion and $1.09 due to higher revenues and gross margins. They are also raising their C10 revenue and EPS estimates from $35.0 billion and $1.13 to $40.0 billion and $1.45.

- Reiterate Neutral rating due to concerns on end demand and downside to estimates. Firm is establishing their December 2010 price target of $17.00 on Intel, which is 12X C10E EPS estimate, at the low end of its range of 12.0X-25.0X earnings.

Notablecalls: I'm not making a call here but I thought to highlight these comments from JP Morgan. Things surely look good here and I see mother Merrill raising their target to $27 along with FBR.

How long will this last?

Everyone is going ga-ga but do note Intel's Q309 revenue is about -7% vs. same qtr last year. Cost cuts, sale of written down inventory etc. brought a lot of upside to the bottom line.

Notice how Intel pared back capex for the year? What does that tell you?

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