First-Quarter Results Least of Intel's Worries

Since Intel ( INTC) reduced the midpoint of its sales guidance in early March, the chipmaker's shares have languished.

Barring a big upside surprise after the bell Tuesday, Intel may be hard-pressed to reignite lasting ardor for its stock, which has underperformed its faster growing peers this year.

Based on Monday's close of $27.60, Intel shares are down 14% year to date vs. gains of 3.1% for the Nasdaq Composite and 1.4% for the Philadelphia Stock Exchange Semiconductor Index.

Intel's sharp decline has prompted some opportunists to swoop in and snap up shares, arguing that the stock is attractive below $30.

Indeed, there is speculation Intel shares could enjoy a near-term bounce -- assuming there are no major negatives in Tuesday's postclose earnings report or conference call.

Noah Blackstein, manager of the $126 million Dynamic Power American Growth fund, believes the stock could see upside after earnings, given that it's already sold off so much this year.

"Unless Intel completely blows up, which I can't see, I think in-line to above in-line guidance would send its shares higher," he said.

Most analysts don't expect Intel to have any trouble meeting consensus estimates for first-quarter earnings of 27 cents a share on sales of $8.164 billion.

Among the reasons for near-term optimism: Dell ( DELL) said last week that unit growth of its computer hardware is running ahead of expectations due to growth overseas. That could translate into upside for Intel, which in 2003 drew 19% of its sales from the PC maker, Intel's biggest customer.

But many investors remain skeptical of Intel's investment prospects, arguing that smaller communications chipmakers offer a better value.

For example, while upbeat on the chipmaker's near-term prospects, Blackstein has sold off his stake in Intel. He believes the longer-term outlook favors faster-growing chipmakers like Broadcom ( BRCM) and Silicon Labs ( SLAB), both of which his fund owns. "Intel's pretty big, pretty mature, and my focus is on growth," he said.

Robert Bacarella, manager of the ( MSCEX) Monetta Select Technology fund, offered a similar view on Intel.

Trading "volume just doesn't show any interest coming into the stock," he said. "We believe the market is very efficient, and the market's saying here that there are no big surprises coming from Intel."

Bacarella sold his holdings in Intel in February, when the stock broke below its 200-day moving average on above-average volume. He moved some of the resulting cash into Broadcom, which has leaped 25% year to date based on Monday's close of $42.68.

Broadcom is growing faster than Intel, with sales up 62% in the most recently reported quarter compared with Intel's year-over-year growth of 22%. Not coincidentally, Bacarella would argue, Broadcom also has seen a far stronger trading pattern than Intel, with its shares lately trading above its 50-day and 200-day moving averages.

Unfavorable Seasonals

Amid largely sanguine views about Tuesday's first-quarter results, opinions are more divided over how Intel will fare in the second quarter, which just got under way. The current consensus estimate assumes Intel can do a little better than usual for the period.

Intel typically sees second-quarter sales decline by 2% to 4% from the first quarter due to normal seasonal buying patterns. That being the case, some analysts think the consensus estimate -- which assumes sequential earnings can stay flat, at 27 cents -- is too optimistic.

Lehman analyst Tim Luke reduced his second-quarter earnings estimates for Intel to 25 cents from 26 cents in late March, saying the consensus estimate is "likely too aggressive." His new projection reflects what he calls a "subdued" notebook outlook.

The move ties in with Lehman's recent downward revision of estimates on unit shipments of notebook computers. The firm now expects shipments to slide 15% from the prior quarter, slightly worse than its initial projection for a decline of 12%.

Luke has an overweight rating on Intel, assuming business trends will strengthen in the second half of the year. But near term, he believes Intel shares are likely to remain in the $26 to $27 range. (Lehman has done investment banking for Intel.)

A more optimistic take comes from A.G. Edwards, which predicts Intel can avoid the usual seasonal fall-off in the second quarter and guide for revenue to stay flat.

Among the reasons, analyst David Wong cites upbeat comments from memory maker Micron ( MU), which on its latest earnings call reported increasing demand in February. "We believe this strength to be an indicator of building momentum in the PC markets, which will also translate into increased shipments for Intel," wrote Wong. (A.G. Edwards hasn't done banking for Intel.)

He pointed out that Intel's second-biggest customer, Hewlett-Packard ( HPQ), is believed to have mostly corrected a slight inventory build in notebook PCs that occurred late last year. That should presumably spur demand for processors as H-P ramps up production of its consumer notebooks again.

H-P chipped in 15% of Intel's sales last year.

But with investors still looking for confirmation of the next leg in the tech recovery, the pressure will be on Intel on Tuesday evening to show the news from Dell and H-P is helping its own bottom line.

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