Intel Surprises Everybody

5/9/2011


  Recent Price
$23
  Dividend
$0.73
  Yield
3.1%
  P/E Ratio
11
  Shares (millions)
5,606
  Long-Term Debt as % of Capital
4%
  52-Week Price Range
$23.46 - $17.60

When Intel ($23; INTC) reported March-quarter results, Wall Street was prepared for the worst.

Blame some of that pessimism on Intel, which had estimated a design flaw in its new semiconductor would reduce sales by $300 million for the quarter. But much of the ill feeling came from headwinds beyond Intel's control, as research firm IDC had reported global shipments of personal computers declined 3% in the March quarter. Analysts were trimming estimates in the weeks leading up to the March-quarter report.  

Then Intel, one of the most widely followed stocks in the world, blew away expectations. The semiconductor maker earned $0.59 per share excluding special items, up 37% and exceeding the consensus by 28%. Sales jumped 25% to $12.85 billion, topping the midpoint of its own usually reliable revenue target by $1.2 billion. Intel, yielding 3.1%, is a Buy and a Long-Term Buy.

Anatomy of the surprise

• An unexpectedly quick fix to the design flaw plaguing Sandy Bridge, Intel's next-generation semiconductor, eliminated the $300 million revenue hit. The new chip also lifted the average selling price of Intel's products.

• Expansion beyond personal computers fueled Intel's success. Sales of semiconductors used in servers rose 32% to $2.46 billion.

• Intel noted strength in emerging markets. IDC, as reported by Barron's, has trouble tracking shipments to developing countries, leaving the potential for undercounting.

As long as the consumer-PC market remains weak in the U.S. and Western Europe, Intel will face valid questions remain regarding its prospects. While Intel controls an 81% share of the PC market, it has struggled to transfer that dominance to other industries.  Smartphones and tablets are siphoning sales from the PC market. Eventually, Intel will need to gain traction in the mobile market, possibly by repairing its relationship with Microsoft ($26; MSFT). The company continues to strengthen its relationship with Apple ($348; AAPL), which is outfitting its latest line of iMac desktop computers with Intel's new processors.

Intel's stock has surged 17% since the March-quarter results. And so have estimates, with all 47 analysts covering the stock raising their 2011 estimates for per-share earnings in the last 30 days. Yet the shares are still cheap at less than 11 times trailing earnings, a 30% discount to the three-year average and 36% below the average semiconductor stock in the S&P 1500 Index. At 10 times the 2011 profit estimate, Intel trades at a 38% discount to industry peers.

Conclusion

For the year, Intel sees 20% higher sales, on top of 24% growth in 2010 and HIS iSuppli's 7% growth forecast for the semiconductor industry. Rising Wall Street estimates now call for Intel earnings of $2.29 per share this year, up 12%.

If Intel matches the 2011 consensus and the trailing P/E returns to its 2010 average of 13 — still modest by historical standards — the shares could reach $30. An annual report for Intel Corp. is available at 2200 Mission College Blvd., P.O. Box 58119, Santa Clara, CA 95054; (408) 765-8080; www.intel.com.

 

INTEL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '11
0.59
vs.
0.43
+ 25%
22.21
-
19.71
11 - 10
Dec '10
0.59
vs.
0.40
+ 8%
22.07
-
18.77
12 - 10
Sep '10
0.52
vs.
0.33
+ 18%
22.28
-
17.60
13 - 11
Jun '10
0.51
vs.
-0.07
+ 34%
24.37
-
19.40
22 - 18
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
43.62
2.05
0.63
24.37
-
17.60
12 - 9
2009
35.13
0.77
0.56
21.27
-
12.05
28 - 16
2008
37.59
0.92
0.55
26.34
-
12.06
29 - 13
2007
38.33
1.18
0.45
27.99
-
18.75
24 - 16
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
100
89
95
90
95
97
51

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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