Bracing For a Cautious Intel (INTC)

Intel Corporation (NASDAQ: INTC) is set to report earnings for its third quarter right after the close.  First Call estimates are earnings of $0.34 and $10.26 billion in revenue.  The biggest issue today is not just going to be earnings but the guidance the company offers investors.  Analysts already are lowering the bar for the chipmaker by reducing their forecasts.

Here is the table for estimates ahead:

Period       Q4-2008   FY-2008
EPS             $0.39         $1.25   
Revenue   $10.77B   $40.14B   

We want to discuss the management of earnings expectations. Analysts have reduced earnings targets over thelast 30 to 60 days by $0.01 for today’s report and they have reducedtargets by $0.02 for the quarter ahead.  While this is reflective of aslower environment, we still feel that Q4 has too much fluffin it.

We have not been able to find any solid data that points to a strong Q4.  Christmas isexpected to be a dud, and we have been hard pressed to find anyphenomenal retail and corporate spending trends that would disprove that notion.

The range from analysts for Q4 earnings is $0.34 to $0.45 and roughly $10.4 billionto $11.3 billion in revenue.  At Intel’s last earnings report, the company guided revenues to $10.0 billion to $10.6 billion and it put margin at 58% plus/minus a couplepoints.  It even gave total fiscal margin expectations of 57%plus/minus a couple a points.  Don’t be overly shocked if those numbersare not down a little from three months ago.  As far as depreciation,R&D, and Cap-Ex, we won’t go there other than noting that expensescan always be cut by a mere one-quarter delay on certain projects.

We would not at all be surprisednor would we hold it against Intel if the company comes in withearnings guidance of for next quarter of $0.34 to $0.39 on $10.3to $10.8 billion in revenue.   

Be advised that we have spoken with everyone we could to come up withthose figures, and a lot of that is interpolated guess work based uponwhat we are seeing in other companies and from conversations.  Even if you factor in the 10%+ rally from Friday’s lows of$14.26, this stock has lost more than one-third of its value from theAugust highs after its last earnings report in July.  At that level,traders shouldn’t overly punish the company above and beyond what wehave already seen.

The recent selling at one point had Intel close to within a challengingdistance its 2002 lows.  Options expire this Friday so much of the timevalue premium is not present in options.  After looking at the closestexpiration, we believe options traders at $16.10 are pricing in a moveof only about $0.70 to $0.90 in either direction.  The average analysttarget is still around $24.00 on the PC processor leader.

We are bracing for a more cautious Intel ahead.  If Intel comes outwith super-strong guidance that is in-line with official estimates,then technology stocks should have a monster trading day on Wednesday.

Jon C. Ogg
October 14, 2008