Publish date:

Intel Heals Hurt

Its earnings report revives faith in a return to strength.

SAN FRANCISCO --

Intel

(INTC) - Get Report

dazzled investors with long-forgotten bounties when it delivered its third-quarter report Tuesday.

The chipmaker served up hefty, double-digit sales increases, rising profit margins and reports of stable pricing -- and a forecast calling for more good times.

Worldwide demand is "strong and growing," said CEO Paul Otellini.

The better-than-expected earnings report was the strongest evidence yet that the old Intel is still alive, after a period of apparent lost vitality.

Now Intel needs to prove that the strong results are the first glimpse of a brighter future and not simply a bounceback from bad times.

Shares of Intel were recently up 3.7%, or 96 cents, at $26.44 in midday trading Wednesday.

Intel bulls greeted the earnings report as a preview of further improvements.

"We continue to believe Intel's superior products and manufacturing will combine to drive upside to EPS estimates and its share price," wrote Deutsche Bank analyst Ross Seymore in a note to investors.

Deutsche Bank makes a market in Intel shares and has received compensation from Intel for investment and non-investment banking services in the past year.

Seymore, who rates Intel a buy, boosted his revenue and profit estimates, as did numerous other analysts following Intel's earnings report.

In the third quarter, Intel

TST Recommends

grew its bottom line 43%, thanks to strong sales in all three of its main products: desktops, notebooks and server processors. The company is benefiting from an improved lineup of dual-core and quad-core chips, as well as healthy demand for PCs.

And after nearly two years of seeing its profit margins squeezed in a price war with

Advanced Micro Devices

(AMD) - Get Report

, Intel projected that its gross margin in the fourth quarter would increase to 57% from 52.4%.

"You look at margins and that will tell you the direction of the stock," says Neuberger Berman Technology Management CEO Dan Niles, who own shares of both Intel and AMD.

At 22 times 2007 earnings, though, Intel's stock is getting expensive for some investors.

"You don't make much money buying Intel at 22 times earnings," says Pat Adams, the chief investment officer of Choice Funds, which does not currently own Intel shares. "The stock's too high relative to the long-term growth of company."

Future growth prospects remain cloudy, despite the blowout quarter.

Intel's $10.1 billion in third-quarter revenue was up 15% year-over-year, the highest growth rate in the past ten years, according to Intel.

At this time last year, Intel's third-quarter sales were down 12% year over year. Compared to 2005, therefore, Intel's revenue has advanced only 1.4%.

Now that Intel is essentially back where it started, investors are waiting to see how fast the company can grow its sales going forward.

Intel's fourth-quarter revenue guidance is interesting. On its face, the projected range of $10.5 billion to $11.1 billion in sales was above Wall Street estimates. But the midpoint of the guidance represents a growth rate of 6.9%, which is below seasonal for what is traditionally Intel's strongest quarter of the year.

Neuberger Berman's Niles said he's not worried about the fourth-quarter guidance, noting that it's more instructive to look at Intel's overall sales growth in the second half of the year.

And he notes that the conservative guidance doesn't necessarily mean a slow fourth quarter, pointing to a similar situation in 2003. At that time, Intel also had a strong third quarter and guided for only 7.7% revenue growth in the fourth quarter. In the end, however, Intel delivered 12% sales growth in the fourth quarter that year.