How far has mighty Intel ( INTC) fallen? Wall Street is so tepid about the giant chipmaker's immediate prospects that most analysts say the company would have to work hard to disappoint when it reports third-quarter results after Tuesday's closing bell. "Anything other than a worst-case scenario should result in stock-price appreciation," says Merrill Lynch analyst Joseph Osha, whose firm does not have an investment banking relationship with Intel. Osha has plenty of company. Wall Street figures that Intel is likely to post an in-line quarter, but there's not a lot of chatter about a large surprise to the upside, or to the downside, for that matter. Indeed, EPS expectations of the 27 analysts polled by Thomson First Call are clustered in a very narrow range -- from a low of 32 cents to a high of 35 cents, with consensus at 33 cents. Revenue, analysts estimate, should come in at $9.92 billion. Intel said in September that it expects gross margins to come in slightly above 60%. "I think expectations are fairly low coming into the call. If management is able to guide gross margins up sequentially for the fourth quarter of 2005, I would expect the stock to react positively," said Loomis Sayles analyst Rich Crable, whose company holds shares of Intel. The world's largest semiconductor company has had a painful year in the market; its stock has been up and down, but it has appreciated just 3% since Dec. 31, closing Monday ahead 23 cents to $23.46. Rival Advanced Micro Devices ( AMD), which has scored a number of technological and marketing "beats," is doing somewhat better, up 8% on the year, and the widely followed Philadelphia Semiconductor Index has gained 10%. The low share price, of course, has pushed Intel's valuation way down, which is another reason investors are likely to view even half-decent results with some favor.
The company is trading at 16 times 2005 EPS and 15 times 2006 EPS, well below historic levels, according to First Call. AMD, meanwhile, trades at the other extreme -- 58 times 2005 estimates and 30 times next year's estimates. Even so, Intel isn't quite cheap enough for Jerome Dodson, president of Parnassus Investments, which manages assets of $1.4 billion. "We'll be buyers below $21 a share," says Dodson, whose company no longer owns Intel. At that price, he says, the downside risk is very low, because it's unlikely that the stock will trade below $18. Dodson adds, however, that his longer-term view is much more positive, and he expects significant appreciation in the medium term. Intel and AMD have danced a complex, competitive minuet in recent years, with AMD now holding the technological edge in microprocessor development, despite Intel's vastly greater resources and manufacturing capacity. Most recently, AMD scored a win with Hewlett-Packard ( HPQ), which is now using the company's Turion mobile chip in high-end notebooks. The win surprised analysts, who generally see Intel's mobile chips -- processors used in PC notebooks -- as the company's strongest suit. "Intel has its work cut out for them," says Nathan Brookwood, principal analyst of Insight64 and a longtime chip watcher. Manufacturing capacity, for instance, is a two-headed problem. First, Intel didn't have enough capacity to build chipsets -- circuitry inside a PC that moves data to and from the microprocessor -- earlier in the year. And second, because a processor doesn't work without a chipset to plug into it, customers who couldn't get Intel chipsets went to AMD for them and for processors, says Brookwood. For now, Intel is ceding low-end chipset business to companies such as Taiwan-based Via Technologies and using the capacity to build chipsets for higher-margin processors, a transition that will take a number of months, the analyst adds.
Meanwhile, Wall Street is fretting over a possible surplus of capacity (for other types of manufacturing) developing in 2006. AMD has made significant inroads into Intel's market share over the years, but the smaller company is far from an equal player. In September, for instance, AMD was the dominant supplier of chips used in PCs sold via the retail channel for four weeks in a row. Overall, though, Intel's share of the processor market was 82.2% in the second quarter, while AMD's share was just 16.2%, according to Mercury Research, an Arizona-based semiconductor market research firm. There's likely to be talk on the earnings call about the market for flash memory, but because flash tends to represent only about 5% of Intel's revenue, it's far less important than discussion of PC demand as well as Intel's progress in readying new products for 2006 and margins. "We believe Intel is poised to regain product momentum, and execution appears to have improved," wrote Deutsche Bank analyst Ben Lynch, who calls the company "a compelling value" at current prices, and says the fourth quarter is likely to be the bottom of the company's competitive slump. Deutsch Bank does not have an investment banking relationship with Intel. CFO Andy Bryant said during a September conference call that the quarter is proceeding as expected overall, with continued healthy growth in the PC market, especially for notebooks. "There is no real surprise in the revenue line," he said.