Intel's Fuse Awaits Spark
Updated from 6:54 a.m. EST
Intel
(INTC) - Get Report
shares are once again on the verge of breaking above $25, which until this week represented an eight-month high that the stock had failed to breach on several occasions. The company's midquarter update after the bell Thursday should help to determine whether the stock will continue to dance around this level or surge to higher ground.
Though the stock of the world's largest chipmaker is up 11% since the beginning of February, it's the movement of the past week that finds the shares once again at this interesting level. Intel finally closed above $25 on Monday and traded above that level during each of the past four sessions. The shares had attempted to top $25 four times -- in early August, mid-November, mid-December and mid-February -- only to pull back. It rose 10 cents to $24.94 early Thursday.
"The stock has been absolutely dead, but it seems people are now edging in," said Bill Priebe, co-president of Geneva Capital Management.
Thursday's update on the company's first-quarter financials will undoubtedly be a key catalyst in deciding whether investors do more than kick the stock's proverbial tires.
So far, options speculators are treating Intel's update in a fairly timid fashion, said Alison Regan, capital markets associate with Susquehanna Financial Group. She said options traders have been mostly selling options around the $25 strike price; the same trend can be seen in options on the Philadelphia semiconductor index and the
Semiconductor HOLDRs
(SMH) - Get Report
.
"Generally, this suggests a nonevent," she said. "This isn't bearish; it just shows that people don't think the stock will move much, and they might be trying to get some premium."
Intel has previously forecasted that its first-quarter sales would come in between $8.8 billion and $9.4 billion -- a sequential drop of 2% to 8.3% compared with an average sequential decline of 5% to 7%. Gross margins were predicted at 55%, down from 56% in the fourth quarter. (Intel doesn't provide expectations for its bottom line.) The first quarter is typically the weakest quarter for Intel and other semiconductor manufacturers, as consumers take a break from spending splurges in the fourth quarter.
Analysts on average expect Intel to earn 28 cents a share on sales of $9.15 billion, according to Thomson First Call.
The ho-hum attitude toward the update seems to be shared by Wall Street, which largely isn't expecting any surprises. Most expect Intel to narrow its sales target around the midpoint of its original target, $9.1 billion.
Analyst Kevin Rottinghaus with FTN Midwest Securities told clients that Intel's sales this quarter seem driven by lower-end desktop and notebook sales while flash memory sales have dropped off as anticipated.
As such, he wasn't too enthusiastic about the stock being able to move strongly from its current position. (Midwest Research expects to receive or intends to seek compensation from Intel for investment-banking services in the next three months.)
"The stock lacks a strong catalyst in either direction to see drastic revisions to current revenue and earnings estimates," Rottinghaus said in a research note. He also stated that the benefits from more notebook and server sales seem offset by slower growth in the PC market, increasing sales of lower-end PCs and increased competition with
Advanced Micro Devices
(AMD) - Get Report
.
However, other investors see longer-term opportunities, as the company continues to try to prove how successfully it has repaired itself from the travails of last year.
Intel encountered product delays and execution issues on several products in 2004, and it found itself saddled -- as did other chipmakers -- with excess inventory midway through the year. All of this occurred amid the planned transition of CEO Craig Barrett to chairman and President Paul Otellini to CEO, which will occur in May.
Intel began to make changes at the start of this year. The company first announced a corporate restructuring in January in an attempt to replicate the success it has had with its Centrino brand of wireless networking technologies. Then the company reported fourth-quarter results, which soundly eclipsed expectations.
The fourth-quarter report came amid lackluster expectations -- similar to the chatter ahead of Thursday's midquarter update -- and shares rose 2.8% after the company's profit.
Analyst Charlie Glavin of Needham & Co. looks for Intel's stock to rise once the company's margins -- the pivot around which its shares typically turn -- begin to expand. Intel has targeted margin expansion for the entire year of 58%, up from 57.7% in 2004. On a quarterly basis, however, Intel's margins should expand sequentially through the year.
Glavin noted that Intel's current stock price places its price-to-earnings ratio at 19 times 2005 earnings -- a 30% discount to the Philadelphia semiconductor index and a 10% premium to the
S&P 500
. (Needham has done no investment banking with Intel.)
If investors get an all-clear sign for the first quarter -- a period during which margins are already expected to contract from the fourth quarter -- and feel confident that margins and fundamentals are on the way up for the remaining nine months of the year, the possibility exists that the $25 ceiling on the stock becomes a floor.