Hot Stocks: Intel Posts Earnings Surprise Because the "Atom" Was No Bomb

[“Hot Stocks” is a new Money Morning feature that analyzes the investment outlook of global companies that are in the news. This is the third installment of this new investment series.]

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

In an announcement that kicks off two weeks of corporate-earnings reports that will be among the most closely watched in years, computer-chip giant Intel Corp. (INTC) yesterday (Tuesday) said that orders for super-cheap computer processors fueled a bigger-than-expected 12% jump in third-quarter profit. The company saw its shares surge in after-hours trading.

The Santa Clara-based Intel – the world’s largest maker of computer chips – posted third-quarter earnings of $2.01 billion, or 35 cents a share, compared with a net profit of $1.86 billion, or 31 cents a share, for the year-earlier period.

Revenue for the third quarter was $10.22 billion, up 1% from revenue of $10.1 billion last year. Analysts had expected the company to report earnings of 34 cents a share on revenue of $10.25 billion, according to a consensus survey by FactSet Research.

Intel’s earnings report alleviated concern that the crisis hitting the world's banking system will cause demand for personal computers to evaporate. While corporate orders for desktop PCs have slowed in the U.S. and European markets, sales remain strong for notebooks and machines made with lower-cost chips, Craig Berger, a New York-based analyst for Friedman, Billings, Ramsey Group Inc. (FBR), told Bloomberg News.

“It was still a good quarter by and large for the PC market,” Berger said. “It’s held up better than I thought.”

Berger – who has an “Outperform” rating on the shares – yesterday cut his target price on Intel stock from $26 a share to $23 a share.

Intel’s shares – which dropped $1.06 each, or 6.2%, to close at $15.93 in regular trading ahead of the after-hours earnings report – rebounded after the market closed to surge 75 cents, or 4.71%, and were trading at $16.68 in after-hours trading as of Money Morning’s news deadline last night. In the last 12 months, Intel’s shares have traded between $14.26 and $27.99.

Fourth-quarter sales will come in between $10.1 billion and $10.9 billion, Intel projects. Gross margin – the percentage of sales remaining after deducting production costs, and a key profitability measure for manufacturing companies – will be about 59%. Analysts in the Bloomberg survey had predicted sales of about $10.8 billion. Berger predicted a margin of 59.3%.

The company, which is the industry's biggest investor in production equipment for the next generation of computer chips, trimmed its capital spending plans for the 2008 year to $5 billion – plus or minus $200 million – from a previously firm estimate for outlays totaling $5 billion, Reuters reported. Intel executives cautioned that demand in the current quarter was uncertain.

“As we look to Q4, it is hard to know what impact the financial crisis will have on end customer demand," Intel President and Chief Executive Paul S. Otellini said in a statement.

The Dawn of Another Earnings Season

Intel is the first major high-tech firm to make a full earnings report for last quarter, kicking off two weeks of announcements that will include search-engine giant Google Inc. (GOOG) and software heavyweight Microsoft Corp. (MSFT). Since Intel’s microprocessors are a central component in more than 75% of the world’s personal computers, it is a high-tech bellwether stock.

In 2009, corporate outlays for computers, software and communications products will drop as much as 5%, Jane Snorek, an analyst at First American Funds in Minneapolis, told Bloomberg. Intel and other technology companies have watched as their shares cratered – all on the concern that the burgeoning financial crisis would cause companies to freeze their information-technology spending, eviscerating profits for high-tech firms.

Indeed, in an attempt to get out in front of all the negative expectations, International Business Machines Corp. (IBM) embraced a different strategy by providing Wall Street with a preview of its third-quarter results.

The expectations weren’t any better for high-tech firms that serve the consumer markets.

The situation is pathetic," Trip Chowdry, a Silicon Valley technology analyst with Global Equities Research, told last week. “Many data points have not yet been factored in. I think the worst is yet to come.”

Intel’s CEO, Otellini, 58, didn’t want to wait for that to happen. He moved quickly to keep demand from evaporating by rolling out a new line of low-cost chips, which Intel has called the “Atom.” The chips, which were introduced this year, run ultra-low-cost computer devices known as “netbooks” and “nettops,” which cost as little as $250. The gizmos are designed for such basic, specific functions as surfing the Internet.

The devices – and with them, the Atom – have been successful with consumers. But analysts are worried that success will carry a price – sacrificing overall profitability.

“I don't like the Atom,” FBR’s Berger said. “It gives customers the opportunity to go from spending $60 or $80 a chip to spending $35 a chip.”
But the 40% nosedive in Intel’s share price has made the stock attractive to bargain-hunters – especially since more than 80% of the company’s sales come from outside the United States. That could really position Intel well should there be a U.S. recession.

“I want to buy industry leaders that have lots of cash, rock solid balance sheets and global exposure,” Frederic Dickson, the chief market strategist at D.A. Davidson & Co. in Oswego Lake, Oregon, said in a Bloomberg Television interview. `”When we can buy it at 2003 levels, we really like it.”

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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