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Intel to start tech earnings season with bang
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Intel to start tech earnings season with bang
Ian Sherr
SAN FRANCISCO
Tue Jan 12, 2010 2:36pm EST
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SAN FRANCISCO (Reuters) - Intel Corp is again expected to surpass Wall Street forecasts when it kicks off tech sector earnings this week, but analysts worry about a stock sell-off if its 2010 outlook isn't rosy enough.
Technology | Media
Chipmakers, whose products are found in everything from personal computers and cars to smartphones, are emerging from the industry's worst downturn in decades and are expected to benefit from renewed spending on technology by corporations in 2010.
Analysts also point to the upcoming Chinese New Year holiday in February -- a season of high spending in the world's third largest economy -- as an indicator of robust end demand.
But some investors worry about a potential, short-lived correction in semiconductor counters. Shares in Intel, which gained more than 8 percent over the holiday quarter, have risen 30 percent over the past six months, bolstered by increased consumer spending in the absence of corporate demand.
"We're on the cusp of an enterprise spend cycle this year. We're on the cusp of improving consumer sentiment and consumer spending for notebooks," said Wedbush Morgan analyst Patrick Wang. But "Intel is cheap," he said, adding its valuation of about 11 times forward earnings for 2010, minus cash, was a historic low based on his data.
Intel, whose chips are found in more than three-quarters of the world's PCs, is expected to report earnings per share of 30 cents, excluding items, up from 4 cents a year earlier, according to Thomson Reuters I/B/E/S.
Distant runner-up Advanced Micro Devices Inc is expected to post a loss per share of 18 cents, excluding items, up from the year-ago loss of 69 cents, as it works to pay down debt and finish spinning off chip manufacturing arm Globalfoundries.
TD Ameritrade chief derivatives strategist Joe Kinahan said that as of Monday's close, Intel's options prices are implying about a 5 percent share price move in either direction post earnings, based on current volatility levels.
"As Intel is the first tech bellwether in the earnings season, there is also some extra anxiety and any type of positive report can send the shares significantly to the upside," he said.
LARGER INCOMES, ON SMALLER PRODUCTS
The holiday quarter is expected to show strong demand, signaling improved conditions after bouts of factory closures and oversupply that plagued the industry for nearly two years.
But investors will be watching average selling prices and margins. Wall Street expects Intel to pull in a gross margin of roughly 62 percent in the fourth quarter, versus just over 53 percent the same time the previous year.
One bright spot in the PC industry has been netbooks, essentially no-frills mini-laptops. They sell for much less than their more powerful laptop brethren, and some worry they are replacing sales of costlier microprocessors.
Data from the Semiconductor Industry Association released this month showed November chip sales rose 3.7 percent from October, the ninth such month in a row.
Some analysts warn there is a correction around the corner for semiconductor stocks. The Philadelphia Semiconductor Index rose 37 percent in 2009's second half.
"You've seen semis run in anticipation of good results, and I think we'll see some selling on the news," Wedbush Morgan's Wang said.
Semiconductor stocks were down 4 percent on Tuesday on the Philadelphia semiconductor index, Broadpoint Amtech analyst Doug Freedman said chip stocks were up 5 percent this month.
"You're waiting for earnings results that some people argue are already priced into the stocks," he said, adding that the sell-off is likely overdone.
Another bright spot is China, one of the world's strongest PC markets. Indications are pointing to robust demand ahead of the Chinese New Year holiday later this month, analysts say.
"Most recently we have heard about upside to desktop demand from China," Auriga analyst Daniel Berenbaum said in a note, upgrading Intel to "hold" from "sell" on Monday.
Berenbaum is cautious on the stock, however, expecting year over year comparisons to peak in the first quarter, and competition from mobile device chip designer ARM Holdings Plc to pick up.
But corporate budgets for the new year are already turning into sales for big-name suppliers, and demand is once again picking up. This could all contribute to Intel garnering some of its highest corporate gross margins ever, possibly reaching 61 percent for 2010, Robert W. Baird analyst Tristan Gerra said.
"There's been a slow but steady recovery in real demand, and the whole food chain is still trying to catch up," Gerra added.
(Additional reporting by Doris Frankel and Sinead Carew in New York; Editing by Edwin Chan and Richard Chang)
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