Intel (INTC)

Earnings season got underway for real with Intel’s (INTC) report after the close on April 15th 2008. They reported $9.7 billion in revenues, a 9% increase compared to the year ago period, and earnings of 25 cents per share - both in line with analyst expectations. Their forecast of $9.0-$9.6 billion was also in line, or possibly slightly better, than analysts expectations. ^[1]

1. ↑ Top Gun Report

Intel's reputation is trusted in the IT industry. It has been a reliable company for PC makers and the PC market for years.

Intel spends more on research and design than any other company in the industry. This large investment is likely to continue yielding cutting-edge products that define the industry standards.

Since pricing is determined by supply and demand, when demand is growing at a faster rate than supply it should be good for pricing, margins and the stocks – subject to a lag between the time equipment is ordered and when it is installed. Last month, when the PPI data showed a poor pricing environment for semiconductors (see the chart of year/year price changes below) I said “I happen to believe the worst will soon be over for semiconductors.” The reason for my belief is that this year’s poor pricing environment stemmed from last year’s over-ordering of equipment, so this year’s thriftiness should start to improve pricing sometime soon.

Furthermore, since Intel and rival Advanced Micro Devices (AMD - Annual Report) were the first companies to over-order, the first to see the damage it did to their margins, and the first to announce cuts to planned expenditures, it should surprise nobody if they are the first to recover as well. Finally, addressing the issue of whether the guidance is too aggressive, a look at the historical data suggests otherwise. Margins for both AMD and Intel are lower than they have been at any time since the depths of the technology bust. A modest improvement from current levels would still leave them well below the normal range, if there is such a thing.

Intel has a strong control of market share in the microprocessing industry. Consistent innovation leaves very little room for competitors to gain a significant amount of their business.

Intel Corp. (INTC - Annual Report) is scheduled to report earnings today, October 16. The consensus among sell side analysts is that the company will report sales of $9.6 billion (up 10% year/year) and earnings per share of $0.30. This puts the average analyst daringly close to the precise midpoint of the guidance Intel provided as its mid-quarter update.

According to the Semiconductor Industry Association (SIA), over the last six months the year/year sales growth for the overall semiconductor industry has ranged from 1.7% to 4.8%. For the largest manufacturer to be growing at more than twice the overall industry rate seems at first glance to be somewhat aggressive.

I looked at inventory levels to see how supply and demand were trending at the company level. For Intel, at least, the inventory levels appear to be drifting back toward normal.

Stock performance following the report may come down to the December quarter guidance relative to expectations. There, too, however, the consensus appears beatable. Current estimates call for $10.4 billion in sales, which is just a 7.5% year/year rise. Given the acceleration in industry growth, that rate may well be in line with the overall industry rate despite the aforementioned justification for Intel to lead the group up.

With company inventory levels having peaked, margins potentially having troughed and overall industry health looking likely to improve, I believe Intel’s guidance is not aggressive, and may even be conservative[1].

However, the nadir in industry sales was in June, and the growth rate has been picking up steadily since then. Furthermore, the industry as a whole has been more disciplined about adding capacity. After more than a year of ordering more chip producing equipment than was needed to satisfy demand from customers, the last six months have seen orders for new equipment being placed at a far slower rate. In fact, sales of semiconductors in August grew 4.8%, while orders for new equipment saw a 19.4% decline year on year.