Updated from 7:53 a.m. EST

Intel's ( INTC) shares remained strong in Wednesday's premarket session as Wall Street sighed with praise for the chip giant's fourth quarter.

The stock recently fetched $23.20, up 66 cents, or 2.9%, from Tuesday's close. Piper Jaffray raised its investment rating to outperform from neutral, while Merrill boosted its 2005 earnings estimate to $1.21 a share from $1.06.

After the bell Tuesday, Intel reported a 2% year-over-year decline in fourth-quarter earnings to 33 cents a share on a 10% jump in revenue to $9.6 billion, beating estimates on both lines.

In addition, the Santa Clara, Calif.-based company predicted first-quarter sales between $8.8 billion and $9.4 billion, representing a potential sequential drop 2% to 8.3%, but providing room for substantial upside over analysts' expected sales of $8.94 billion. First-quarter sales typically drop 5% to 7% at Intel.

"They are taking a fairly cautious tack," said analyst Cody Acree with Legg Mason Wood Walker. "Typically, a seasonal decline entails both a rollover of internal demand and inventories have to be depleted, but they have already taken inventories down. This is a very realistic number and possibly a conservative number as well."

"A lot of negative news has been priced in and most of what Intel reported could be interpreted as positive," said Pam Hegarty, global technology team leader for Baring Asset Management, which has about $32 billion under management. She said Intel shares are currently trading at the low end of what she considers a "reasonable valuation range."

Intel President Paul Otellini, who will take over as chief executive in March from Craig Barrett, said the company is expecting PC units to grow by double-digit percentages in 2005. This is more optimistic than current industry estimates, most of which peg PC growth in the low-to-mid-single-digit percentage range.

"I take it with a grain of salt because as they plan for production levels they are better off overshooting than undershooting, but to expect a double-digit unit-shipment rate for PCs is a pretty bullish statement," said Hegarty.

Intel also set strong increases in capital expenditures with a projected budget between $4.9 billion and $5.3 billion for 2005, representing a 29% to 39% boost from the $3.8 billion it spent in 2004.

Stocks of chip-equipment companies advanced strongly on the capex target, with Applied Materials ( AMAT), KLA-Tencor ( KLAC) and Novellus Systems ( NVLS) each adding between 3% and 5% after the bell Tuesday.

For the quarter ended on Dec. 25, Intel earned $2.1 billion, or 33 cents a share, on sales of $9.6 billion. During the same quarter last year, Intel earned $2.2 billion, or 33 cents a share, on sales of $8.74 billion.

Analysts had expected earnings of 31 cents a share on sales of $9.42 billion, on average, according to Thomson First Call.

During Intel's midquarter update on Dec. 2, the company predicted sales between $9.3 billion and $9.5 billion, with gross margins between 55% and 57%. Actual gross margin was 56%.

Intel cited record revenue and strong demand for its architecture products - microprocessors, chipsets and motherboards -- in all geographies and channels. Selling prices held flat from the third quarter.

The architecture unit accounted for all of Intel's profits. On $8.23 billion in sales, which was up 15% from the third quarter, the unit grossed $3.48 billion in operating profit, up 25 percent.

Flash-memory units rose and prices fell, but the company claimed market-share gains. On Monday, Intel's primary flash competitor, Advanced Micro Devices ( AMD), announced that it would not hit its sales and operating income targets, primarily because of weakness in its flash unit.

The communications unit -- which includes flash memory products -- sold $1.36 billion worth of product, up 2.7% from the third quarter, and lost $196 million, narrowing from a loss of $250 million in the previous period.

Chief Financial Officer Andy Bryant said the company is committed to profitability for the unit, but that he didn't know if it would happen at the end of 2005 or in 2006.

Intel said inventory declined $560 million, or 18%, to $2.62 billion from the previous quarter. Intel had projected its inventory would fall by "several hundred million dollars." The greater-than-expected decline put Intel's inventory below what Bryant said he was comfortable with. Inventory might creep back up in the first and second quarters, he said.

For the year, Intel earned $7.5 billion, or $1.16 a share, on sales of $34.2 billion. During 2003, Intel earned $5.64 billion, or 86 cents a share, on sales of $30.1 billion.

Gross margin for the first quarter is expected to be 55%, with full-year gross margin targeted at 58%. The company logged gross margin of 57.7% for 2004. Expect gross margin to expand in the second half of the year as start-up costs decline.

Research and development spending is expected to grow 8.3% to $5.2 billion in 2005 -- its highest amount ever -- from $4.8 billion in 2004. Depreciation is going to decline, for the third straight year, to $4.4 billion in 2005 from $4.64 billion in 2004.

Intel did not repatriate any foreign earnings in the fourth quarter, as the final tax rules as part of the "American Jobs Creation Act" had not yet been released, Bryant said. Intel has roughly $6 billion worth of foreign-based earnings that could be brought back into the U.S. at a special, reduced rate of 5.25% vs. the standard rate of 35%.

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