SAN FRANCISCO -- All signs point to a solid quarter for Intel ( INTC). Worldwide PC sales are ticking along nicely, with analysts projecting a 13% increase in shipments this year, and Intel is putting the screws to its main rival Advanced Micro Devices ( AMD). In September, Intel upped its financial forecast for the third quarter -- the first time in more than two years that the chipmaker has raised estimates in the middle of a quarter. Yet the mood on the Street is cautious. After rising some 25% this year, Intel's stock has been stuck in a holding pattern since it reported its second-quarter results. In fact, the stock's closing price Monday of $25.75, up 20 cents or 0.8%, is actually down by a couple percentage points since then. One worry weighing on investors' minds is pricing, particularly given the battering that Intel's profit margins have taken over the last year from its price war with AMD. In a note initiating coverage of Intel with an underweight rating, Morgan Stanley analyst Mark Lipacis wrote that Intel and AMD have enough manufacturing capacity to supply 110% of demand, a situation that "increases the risk of greater-than-normal pricing pressures for microprocessors." Morgan Stanley makes a market in Intel shares and has provided the company with investment and noninvestment banking services in the past 12 months.
Intel's gross margins dropped to 46.9% in the second quarter -- the lowest level in years and a far cry from the 60%-plus margins that Intel often posted a few years ago. But the chipmaker has forecast a big rebound in the third quarter, telling investors to expect margins above 52%. Where the margin ends up when Intel reports its earnings after Tuesday's market close, as well as any change to its projection of a 51% full-year gross margin, could dictate the stock's movement. FTN Midwest Securities analyst JoAnne Feeney believes fears of Intel price cuts are overdone. The price reductions that have been reported are for older versions of Intel microprocessors, which is standard practice in the business, she says. "We're seeing the normal price cuts and people are thinking it's a price war," says Feeney. Feeney believes the average selling prices -- and margins -- were strong in the quarter, thanks to an improved mix of newer chips that Intel introduced at higher prices. FTN Midwest makes a market in Intel shares. Healthy third-quarter sales of notebook PCs are also helping Intel, says Nollenberger Capital Partners analyst Patrick Wang. He notes that mobile products are Intel's highest-margin business, and Intel is particularly well-positioned to benefit from the current notebook boom, having released a
new set of mobile chips dubbed Santa Rosa in May .
"As we see a richer mix of notebook chips from Intel, expect that to really benefit them on the bottom line," says Wang. The average analyst expectation calls for Intel to earn 30 cents a share in the third quarter with revenue up 10% year over year at $9.6 billion, according to Thomson Financial. After ceding market share to AMD in recent years, Intel has mounted a formidable counterattack, backed by a broad lineup of new products. Last month, Intel
showed samples of its newest microprocessor , known as Penryn, which is slated for release in mid-November. Intel has shrunk the circuits on its Penryn chips from 65-nanometers to 45-nanometers, improving performance and energy efficiency. That could blunt the effect of Barcelona, the long-awaited quad-core microprocessor featuring less-advanced 65-nanometer circuits that AMD launched last month . "They're Intel definitely on the rebound, coming out of a hole. We all know that," says Daniel Morgan, a portfolio manager at Synovus Trust Company. But Morgan says he has yet to see any compelling evidence that Intel has got something to take it to its next level of growth. While his firm has some residual positions in Intel, he is not actively buying the stock. The tentative attitude is also reflected in analysts' expectations for Intel's fourth quarter -- typically the chipmaker's strongest -- which calls for 8.3% revenue growth between the third and fourth quarters. Only once in the past five years has Intel posted fourth-quarter growth below double-digit levels, and that was in 2005 when Intel was at its biggest disadvantage vis-a-vis AMD. Intel has rediscovered its fighting spirit and improved its technology, but investors are still waiting for the big payoff.