Updated from 9:28 a.m. EDTIntel ( INTC) shares dipped in early trading, as investors were unimpressed over a largely in-line quarter. In recent trading the stock was down 21 cents, or 0.8%, to $27.46. Late Tuesday the chipmaker posted an 89% gain in profit from the year-ago quarter and said profit levels will stay about the same in the quarter now under way. On the downside, the midpoint of its broad sales guidance fell a touch below the Wall Street consensus estimate, and the company admitted to a slight buildup in inventory. At Deutsche Bank, analyst Ben Lynch called Intel's first-quarter results "relatively uninspiring." The upside in the first-quarter gross margin was overshadowed by disappointing second-quarter guidance, he noted. Relatively little new information on PC trends emerged, other than that desktop demand is running as expected and excess notebook inventory has been cleared. He cut his second-quarter EPS estimate to 25 cents from 27 cents, while offering a few words of caution. "We continue to believe the market has overestimated Intel's 2005 gross margin potential, and specifically the risk from a more competitive AMD ( AMD)," he wrote. Still, he has a buy rating on the stock, explaining that although Intel is no longer a momentum play, it "remains the quality semi stock" in light of its relatively low valuation and strong cash flow and returns. Deutsche Bank has done investment banking for Intel. On a more upbeat note, Fulcrum's Clark Fuhs says he favors the higher end of second-quarter guidance because he believes Intel management is being conservative. "Demand from increased corporate spending should help the PC and server markets this year," he wrote. He believes semiconductor makers are likely to see the usual late-summer pickup in demand occur earlier than usual, perhaps as early as June or July, because supply is relatively tight this year. For that reason, he predicts Intel's June midquarter update will be a positive catalyst for the stock. "I think the numbers were pretty much in line," said Tai Nguyen, an analyst at Susquehanna. "The gross margin for the first quarter is good. If you exclude the charge, it's about 62%." Referring to the slight decline in the stock, "they may just have some negative bias in the near term, but I don't think it would fall much lower," he said. "It seems like there's strong support in the low-$27 range." (Nguyen has a net positive rating on the stock; Susquehanna doesn't do investment banking.) No major brokerages changed their rating on the stock Wednesday morning, although CSFB cut its 2004 earnings estimate by a penny to $1.14 a share and Morgan Stanley lowered its estimate to $1.25 a share from $1.27 a share. On March 4, Intel signaled a slight slowdown in business in a midquarter update, prompting analysts to revise their estimates a bit downward; the news has
Intel's first-quarter sales totaled $8.091 billion, up 20% from last year's levels. Though it's a rounding error, that's a tiny bit short of the analyst mean estimate for sales of $8.164 billion. Gross margin stood at 60.2%. Intel management acknowledged the company had built $277 million in inventory in the first quarter, which one analyst noted on the conference call appears to be the highest increase since 1995. Chief Financial Officer Andy Bryant said the buildup had occurred because manufacturing yields had turned out to be much better than expected, as the company shifted to more advanced chipmaking technology. Bryant noted that inventory amounts to only a week or 10 days' worth, which the company should have no trouble working through -- assuming normal seasonal patterns. He said the slight buildup is better than lousy yields. "Any time inventory goes up, it raises an eyebrow," said Kevin Rottinghaus, an analyst at Midwest Research. "But it looks like yields were just better than people had planned. I don't think it was necessarily a bad thing." Rottinghaus added that Intel's revenue turned out to be "a little lighter than we had been looking for. We'd thought it would be more towards the high end" of the guidance range of $8 billion to $8.2 billion. Still, he has a buy rating on the stock, anticipating that enterprise spending will pick up later this year; his firm doesn't do investment banking. But others sounded a warier note. "We believe Intel needs above-seasonal revenue growth during the second half of '04 in order to avoid either an inventory writedown or lower utilization rates," warned J.P. Morgan's Chris Danely in a Wednesday morning note. At 79 days, inventory is the highest it's been since 1995, he noted. Danely said the inventory build poses a risk to gross margins, since the company might have to clear it out by cutting prices or write down its current inventory. J.P. Morgan hasn't done banking for Intel. In other first-quarter details, operating income in Intel's flagship microprocessor line jumped 58% year on year, to $3.015 billion. Unit sales of microprocessors were lower in the first quarter but the average selling price was slightly higher. Meanwhile, Intel's communications group -- which now includes flash memory, wireless connectivity products, and cell-phone processors -- posted a loss of $219 million, nearly identical to last year's $218 million loss. Intel said second-quarter revenue is expected to fall to between $7.6 billion and $8.2 billion, reflecting a range from a decline of 6% to a 1% increase in sales. The midpoint of sales guidance, $7.9 billion, is slightly below analyst expectations for $8.087 billion. Gross margin should remain at about 60%, plus or minus a couple of points, for the second quarter, the company said.