Intel: At Least It's Not AMD

That may be the only thing it's got going for it this quarter.
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Crumpled profit margins and stagnant sales don't generally denote a thriving enterprise.

But

Intel's

(INTC) - Get Report

financial performance might not look so ugly when the chipmaker delivers its first-quarter results Tuesday, thanks to the jaw-dropping travails of its main competitor.

Last week,

Advanced Micro Devices

(AMD) - Get Report

warned the Street that its sales would be a whopping $475 million less than the high end of its initial estimate, as unit sales and average selling prices declined sequentially.

Compared with such a massive revenue miss, Intel's problems seem less glaring: Intel's business may be under pressure, but at least the company appears to have a solid grasp of the demand for its products.

For nearly a year, the Santa Clara, Calif., company has been in fix-it mode. In June, Intel

began a restructuring effort that cut its employee numbers by 10% and should save billions of dollars in operating expenses.

And the company has shed distractions such as its cell phone communications and application processors business, which it sold to

Marvell Technology

(MRVL) - Get Report

for $600 million last year.

Most important, Intel has regained the technology edge in the market for PC and server microprocessors. The company

refreshed its entire line of microprocessors in the summer of 2006 and has beaten AMD to the punch in releasing quad-core chips.

Though AMD has eaten into Intel's market share, taking 25% of the total microprocessor market in the fourth quarter attributable to deals with PC makers such as

Dell

(DELL) - Get Report

, some

analyst and investors believe that the tide is set to turn back in Intel's favor.

JoAnne Feeney, an analyst at FTN Midwest Securities, reckons that Intel regained market share in all product categories -- desktops, servers and notebooks -- in the first quarter. FTN makes a market in Intel.

Investors have bid up Intel's stock 23%, to $20.69 Monday from its 52-week low of $16.75, as the company has shown signs of getting its act back together.

The question now is when Intel's turnaround efforts will have an impact in its

income statement.

First-quarter results will give investors little to smile about, and few are holding out hope of an upside surprise.

The average analyst expectation calls for Intel's first-quarter revenue to increase a scant 1% year over year to $9 billion, with EPS of 22 cents, according to Thomson Financial.

Intel has pegged its first-quarter

gross margin at 49% plus or minus a couple of points. A year ago this time, Intel's gross margins were 55%.

Intel bulls are looking for the company's fortunes to accelerate in the seasonally strong second half of the year, and they will be paying close attention to any tweaks the company makes to its full-year outlook, from capital spending plans to profit-margin expectations.

"I think the company could surprise on the upside on gross margin as we go through the year, depending on health of the PC market," says PNC Advisors Vice President of Equity Research Bill Gorman.

Gorman, whose fund owns Intel shares, has a price target of $26 on the stock.

Second-Half Optimism

As it is, Intel's full-year gross margin guidance stands at 50%, which Gorman says implies that margins will remain depressed during the second quarter and pick up in the back half of 2007.

Market share gains, new product introductions and a seasonal rise in demand should all converge in the second half of the year.

If all those pieces fall into place, then the 50% full-year gross margin guidance could prove conservative, according to some investors.

Of course, there are still plenty of potholes dotting the road ahead, including the so-far

disappointing boost to PC demand triggered by

Microsoft's

(MSFT) - Get Report

new Vista operating system as well as the fierce price war that Intel and AMD have been waging for several months.

Both companies have plenty of incentive to continue competing on price, despite the devastating effect that has had on profitability.

AMD's Barcelona quad-core processor will not be released until later this year, leaving the company few options in the meantime besides price cuts as it competes with Intel's new chip lineup.

And Intel has $4.3 billion of inventory on its

balance sheet -- $1.7 billion of which is finished goods -- meaning that it might not be done slashing the prices of its own chips.

Under these conditions, the microprocessor market may not be so much about winning as it is about losing less than the competition.