Intel Aims to Get Off the Bench

Investors await clues that a flurry of activity will ultimately spark shares.
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Intel

(INTC) - Get Report

has started the new year with a bang -- unveiling new products and a fresh branding campaign, and signing a major customer all in the span of a couple of weeks.

As the company delivers fourth-quarter results Tuesday afternoon, investors will be looking for the first clues about how these initiatives might affect finances and boost Intel's stagnant stock price.

Traditionally a bellwether of the semiconductor industry, Intel has found itself stuck on the sidelines of the chip sector's latest rally. While the

Philadelphia Semiconductor Index

is up about 9% since the start of the year, Intel's stock has languished, trading within a narrow two-dollar range.

Some analysts and investors believe that could change in 2006, as a slew of new initiatives starts to pay off. But as far as the company's recently completed fourth quarter is concerned, no one is expecting any fireworks.

In fact,

Apple Computer's

(AAPL) - Get Report

recent announcement that it is now shipping Intel-based Macs -- about six months earlier than expected -- in some ways makes Intel's quarter look even bleaker. The $10.5 billion midpoint of Intel's fourth-quarter revenue guidance represents a sequential growth rate that's a few percentage points below its historical level.

The fact that Intel garnered revenue from Apple during this time means that the fundamental sales slowdown at Intel was even greater than many people believed.

"I think Apple is doing nothing more than offsetting share losses to

Advanced Micro Devices

(AMD) - Get Report

," says American Technology Research analyst Doug Freedman.

In its December midquarter update, Intel CFO Andy Bryant acknowledged that the company was losing some ground to AMD.

Recent reports that

Dell

(DELL) - Get Report

may be preparing to roll out notebooks with AMD processors, ending its exclusive relationship with Intel, have only heightened those concerns. During Intel's conference call Tuesday, analysts will be listening closely for more details on the extent of this market-share loss.

While AMD has gained ground thanks to its popular Opteron server processor, some investors argue that recent market-share reversals also owe to execution issues at Intel, particularly its chipset manufacturing constraints. Faced with a shortage of chipsets -- the components that function alongside microprocessors -- Intel has dedicated its available supply to high-end notebooks, effectively ceding the low end of the market.

"AMD is more competitive than they have been in the past, but part of that is because Intel has botched it up so bad

with capacity constraints," says one investor with a long Intel position. "When Intel has plenty of capacity by mid-next year, they're not going to be walking away from the low end of the market anymore."

Intel bulls also note the company's strong pipeline of new processor introductions this year, including the recently launched mobile Core processor, as well as forthcoming server chips, should improve the company's competitive position with AMD and help Intel regain some market share.

And although the Apple business hasn't lifted Intel's top line yet, that should change in 2006, as Apple converts the brunt of its Mac line to Intel chips. Macs currently account for almost 3% of the worldwide PC market -- a nice piece of extra revenue for Intel.

Taken together, say some analysts and investors, this leaves room for upside in Intel's 2006 results. As it is, the average analyst forecast for 2006 revenue calls for a relatively modest 8% annual growth rate, compared with the 14.6% growth Intel is expected to report for 2005.

Intel isn't likely to issue full-year guidance for 2006 on Tuesday. But the company's revenue guidance for the first quarter will be instructive, say analysts. The first quarter sets the pace for the rest of the year, notes AG Edwards analyst David Wong. AG Edwards owns shares of Intel and has provided non-investment banking services to the company.

Wong projects a 5% sequential decline in first-quarter revenue, which he says is slightly less than the typical seasonal decline thanks to an easy comparison with Intel's weak fourth quarter. Deutsche Bank's Ben Lynch forecasts only a 2.3% sequential decline in the first quarter, driven by healthy PC demand, new products and easing chipset constraints. Deutsche Bank owns shares of Intel and expects to receive, or seek, investment banking compensation from Intel in the next three months.

The average Wall Street forecast for the first quarter is currently $10.04 billion, down 4.8% sequentially from the fourth-quarter consensus, with an EPS estimate of 37 cents.

A key data point for the current first quarter will be Intel's gross margins, which are being influenced by two opposing forces: Intel's transition to 300-millimeter wafers and 65-nanometer circuitry will bolster margins, but as the fourth quarter's $200 million to $400 million inventory build is worked down and moves from the balance sheet to the income statement, some investors predict gross margins could suffer a little.

Intel also may provide a gross margin target for the 2006 calendar year, as it did at this time last year.