Can Intel Hit Its 10-Year High?

Intel's shift in business could mean this is the quarter when it surges higher.
By Chris Laudani ,

Intel (INTC) - Get Report reports earnings after the closing bell on Wednesday, and the company looks to be on the verge of a big recovery. This quarter could be the catalyst for Intel shares to surpass their 10-year high.

Last week IDC/Gartner said second-quarter PC unit sales came in better than forecast. Worldwide PC shipments were down 4.5% year over year vs. its previous forecast of a drop of 7.5%. PC units declined 12.5% in the first quarter.

Because last year was so terrible, PC unit comparisons get easier each quarter this year. For example, third-quarter units are expected to be down just 1%. Last year, units were down 9%.  Worldwide PC units could even post a positive number by the fourth quarter. Investors probably haven't anticipated this bit of good news.

Despite the easy comparisons, Intel's PC business will be less than 50% of revenue by the end of the year.

Intel's growth segments -- data center, the memory business and "Internet of Things" -- are beginning to offset the declining PC business. For example, analysts estimate Intel will report total fiscal 2016 sales of $57.3 billion, up 3.5%. Of that, $24 billion will come from Intel's growth segment, which is projected to grow at 17.5% this year, while Intel's legacy business is expected to decline 5.3%.

Looking forward to next year, Intel's growth segment will tack on another 12%, while the legacy business declines 1% to 3%. That means, by next year, the growth business will offset the legacy business. Intel's top-line revenue will probably grow 4% to 5%. Fiscal 2017 could have the best top-line revenue growth in five years. By 2018, Intel will no longer be considered a PC microprocessor company.

Because of the shift toward growth, Intel should begin to see improved gross margins, as higher-margin chips replace lower-margin PC processors. Furthermore, Intel's workforce reduction of 11,000 should help keep the company's costs in line. The $1.4 billion in savings by mid 2017 should flow directly to the bottom line and help operating margins, which should go from 25% in 2015 to 26% this year and could go as high as 29% by 2018.

Because of an improved top line and better margins, earnings should begin to expand. Last year earnings per share grew just 1%. This year, EPS should grow about 4% to $2.42. Next year, EPS could be up 9% to $2.64.

For the second quarter, Intel is expected to report sales of $13.5 billion and earnings per share of 53 cents. Gross margin is expected to be down to 61%, from 62.7% last quarter, because the second quarter is a seasonally slow quarter.

Overall, I think this will be the quarterly report that pushes Intel through $37, its 10-year high. I think investors will give Intel a higher multiple as they begin to see the shift away from the PC business.

While I don't think Intel will ever trade at 29 times earnings like it used to, with a 3% dividend yield and some decent growth, the stock could trade in the range of 16 to 17 times earnings, which would get it into the low $40s.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...