Intel ( INTC) shares rose Wednesday as investors were soothed by a solid financial report and first-quarter projections from the world's largest chipmaker.
Intel's fourth-quarter net income fell 2% to $2.1 billion, but earnings of 33 cents a share and 10% revenue growth to $9.6 billion surpassed Wall Street's financial targets. Also, Intel's first-quarter sales targets of between $8.8 billion and $9.4 billion provided room for substantial upside to analysts' expected sales of $8.94 billion. "Intel's report yesterday was excellent," said Stephen Leeb, president of Leeb Capital Management and manager of the MegaTrends Fund. "It says that during the past six months, despite inventory problems and despite tough comparisons to a blowout year in 2003, that Intel still managed to grow their top line and bottom line." Leeb, who manages about $100 million, was most impressed with Intel's gross margin target of 58% for 2005 and the company's strong growth in emerging markets. "The big picture for Intel is that it may no longer be a cyclical stock. This may be a growth stock, thanks to India and China and surging demand there for PCs and Intel-related products." Placing Intel in the growth-stock category is a strong statement, considering it just wrapped a year with revenue of $34 billion. Still, Intel President Paul Otellini, who will take over as chief executive officer 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. A portion of that growth has to come from emerging markets, which aren't as saturated with PCs as industrialized nations. "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 Pam Hegarty, global technology team leader for Baring Asset Management, which has about $32 billion under management.
However, most investors were content to be on the bullish side Wednesday. Shares were recently up 2.4% to $23 Wednesday. Hegarty, too, took note of the margin targets. She said that the company's stock typically doesn't move higher unless Intel is expanding its profitability. On the basis of a weaker first half, Intel's margin expansion should accelerate in the second half of the year. Analyst Charlie Glavin at Needham estimated that the third and fourth quarters should see Intel boost its margins by 1 to 1.5 percentage points a quarter. "Intel may not be the hyper growth company of the 1990s, but it has rebounded from the embarrassing gaffes of early 2004 to reposition itself for earnings expansion in 2005," Glavin said in a morning research note. 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%. 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%. Flash memory units rose and prices fell, but the company claimed market-share gains. On Monday, Intel's primary flash competitor, AMD ( AMD), announced that it would not hit its sales and operating income targets, primarily because of weakness in its flash unit.