Intel (INTC) Q3 Earnings Preview

October 18, 2011

Intel (INTC) is at a juncture heading into earnings. The company has continually stated that they can be a growth company which will participate in the secular growth of emerging market technology adoption. Moreover at the corporate analyst day, a year and a half ago, Intel raised their longer term gross margin guidance from a range of 50-60% to 55-65%. In short, Wall Street still doesn’t believe Intel despite remaining on their plan for a number of quarters. The recent stock price multiple has drifted between about 8.5x-10.0x current year earnings for some time. Goldman Sachs semiconductor analysts, Jim Covello has had a sell rating on Intel for most of this year and is predicting a massive decline in gross margins next year. The company view is that despite heavy growth in CAPEX spendings gross margins will hang in at the middle part of the new (higher) range.

Heading into Q3, Intel shares have rallied to the high end of the recent trading range. We are getting closer and closer to 2012 guidance. If the bearish views on the street are to be correct, Intel will need to acknowledge a severe gross margin decline for next year. If Intel sticks to their view and current business trends persist next year, Wall Street earnings estimates are way too low and the stock poised for a breakout to $30.

Into Q3:

  • Company Sales Guidance $14.1B (+/- $500M)
  • Street consensus ($13.87B)
  • Gross Margin company guidance (63% GAAP, and 64% non-GAAP) +/- 2%
  • Street Gross Margin estimates generally range from 63%-64.3%
  • EPS consensus is for $0.61
  • Street range is generally $0.60-$0.62

Q4 guidance will be important

  • Normal sequential sales seasonality is for 6% growth in Q4
  • Wall Street consensus is for +2.5% growth
  • EPS for Q4 are estimates at $0.65

2012 the street is only expecting $2.44 which is 3% growth. If Intel continues the current business run-rate they could easily earn $2.60.


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