Digging In For Dismal Intel Earnings (INTC)

Intel Corporation (NASDAQ: INTC) is set to report earnings right after the close.  The company has already said the quarter would be atrocious.  More than once.  But there are some things which are far more important to the company.  What it says during the conference call could either set the stock headed toward $10 or send shares higher by bolstering investors’ optimism.

For starters, Thomson Reuters (First Call) has estimates for this last Q4-2008 period at $0.04non-GAAP EPS and $8.21 billion in revenue.  Just on January 7, thecompany gave projections of Q4 revenues at roughly $8.2 billion.  Thatwas more than $500 million shy of estimates, andrepresented a 20% decline  from last quartersequentially and a 23% drop from last year’s Q4.  Margins are now expected tobe in the lower-end of that 55% plus or minus a couple of points.

Estimates have come crashing down over the last 90 days.  And thecomparisons are just ghastly.  Intel made $0.34 non-GAAP EPS just aquarter ago, and it posted $0.40 non-GAAP EPS in the Q4-2007 period.On a GAAP basis, shareholders have to deal with something far moresinister.  The company said it would be taking a writedown of $1.1billion  to$1.2 billion on its Clearwire position.

We already know the past quarterstank, and we assume the same for at least the current quarter.  Theerosion in PC and tech companies has continued to surprise again and again on the downside.  If Intel takesits numbers down too much more for the quarter ahead or for all of2009, then the only reason Intel will look cheap is because of how muchthe stock has sold off.  Arguably, it may trade at 20-times forward earnings.  That won’t lure in any major value buyers.

Next quarter estimates are $0.12 non-GAAP EPS on $7.28 billion inrevenue.  We think that Intel will pause before giving any annualguidance.  If it is smart, it will at least just say "We are braced andprepared for the extremely weak climate to continue for some time, andwe will update our own annual targets in the coming months when moreclarity is available."  The current estimates for fiscal Dec-2009 are$0.69 non-GAAP EPS and $31.25 billion in revenue.

Lastly, we want to address margin compression.  If you have purchased anetbook or one of the sub-$500 desktops of late, you are not alone inbeing shocked at just how much computing power you get for so littlemoney.  The good news is that most people still want Intel over AMD.But the bad news is that the low-cost computing is coming out ofeveryone’s "you know what" in the PC components sector.  Making PC’s is now no different than being in the home appliancesbusiness.  Even if you count business, it is still an appliance.  Andthe IDC data shows such a drop off in the growth and the trends goingto low-end desktops and netbooks that it is impossible to expect Intelto come out swinging for the fences today.

The good news is that analysts’ estimates have been ratcheted down and down for the quarters ahead.  We want to believe that things will get better.  Historically theyalways have.  We just don’t expect any great projections ahead from the company along with today’s report.  If you have watched other companies in the sector, our pause is more than justified.

Jon C. Ogg
January 15, 2009