In Qualified Praise of Intel

Analysts applaud politely at the chipmaker's midquarter update but don't yet see a spark for shares.
By Chris Kraeuter ,

Intel (INTC) - Get Report investors got the news they wanted from the company's midquarter update -- a sales guidance boost toward the high end of goals and better-than-expected gross margins -- but shares continued to remain stuck below $25 as analysts weren't yet seeing a drastic uptick in semiconductors.

Buying in the shares was brisk in the late-trading session on Thursday -- rising as high as $25.50 -- but that momentum faded by Friday morning. Shares recently fell 1.2% to $24.55, as tech stocks appeared headed for a week's end selloff.

Analyst Kevin Rottinghaus of FTN Midwest Research nudged up his earnings estimates on the company through this year, but he stuck with his thesis that Intel's stock remains in a difficult position. He acknowledged the positives Intel cited for its first quarter, but he also noted that any improvement seen in the second quarter would likely be merely seasonal in nature, and the company won't benefit from the extra week it has in the first quarter.

"The stock lacks a strong catalyst in either direction to see drastic revisions to current revenue and earnings estimates."

Rottinghaus' note seems to echo the qualified praise that analysts had for Intel and the broader semiconductor sector on Friday.

Analyst Cody Acree with Legg Mason Wood Walker said investors should feel confident that the inventory correction in the semiconductor industry is coming to an end.

"While we do not believe Intel's report should be viewed as an indication that all semi fundamentals are better than expected, we do view the company's update as confirmation that the industry is troughing in the first quarter and is, therefore, likely to show growth through the remainder of the year," Acree said in a morning research note.(Midwest Research expects to receive or intends to seek compensation from Intel for investment-banking services in the next six months. Intel has been a client of Legg Mason's in the past 12 months.)

Even Intel was a bit blase about its performance during the quarter, although it now expects sales between $9.2 billion and $9.4 billion and gross margins of around 57%. At the quarter's start, Intel forecasted sales between $8.8 billion and $9.4 billion and gross margins of 55%.

"This is a slight increase in the midpoint -- $200 million on a base of $9 billion isn't a big number," said CFO Andy Bryant.

Intel's new sales goals represent a sequential decline of 2% to 4% compared with a typical decline of 5% to 7%. Bryant said the improved forecast comes from all products and all geographies in which chipsets, as well as certain microprocessors, are under tight supply.

The bellwether's update capped a solid week for chipmakers:

Altera

(ALTR) - Get Report

,

Xilinx

(XLNX) - Get Report

and

National Semiconductor

(NSM)

all had strong earnings news.

Still, the past few sessions have been a wash for most semiconductor stocks. The Philadelphia Semiconductor Index dropped 1.3% on Friday, falling just under its starting point for the week.

Investors might be waiting for more information about the second half of the year before making a stronger commitment to the stock. The final six months of 2005 represent the period during which Intel was expected to get almost all of its gross margin improvements.

Bryant kept Intel's full-year margin target steady at 58%, plus or minus a few points, and he obliquely offered that margins in the second quarter might decline from the first.

However, the stage is set for Intel to outperform its margin goal for this year, or at least get into that "plus a few points range" above 58%. That's good news for investors.

Margins for this quarter are now expected to be 2 points better than previously anticipated. Half of the savings are coming from one-time benefits associated with the factory setup of 65-nanometer equipment. Intel has stated several times during the past two weeks that this transition is proceeding very well and is on schedule.

This transition should provide solid cost savings and efficiencies for Intel, but expect that not all of those efficiencies are baked into that 58% gross margin target.

Interestingly, Intel's all-time gross margin high was 63.6%, logged in the fourth quarter of 2003. It was during that quarter and at the start of 2004 when Intel shares hit $34 on several occasions, a two-year high at that time and a level that hasn't been approached since.

For now, Intel investors would settle for getting beyond $25.

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