Friday, January 15, 2010

In What Direction Will Intel Point The U.S. ?

The Wall Street Journal

Intel's earnings growth last year helped power gains in the stock market and signaled recovery in the broader economy. The company's predictive power is worth keeping in mind should its fourth-quarter earnings report on Thursday disappoint.

The semiconductor company is expected to post earnings of 30 cents a share, up from four cents a share in the fourth quarter of 2008, according to analysts polled by Thomson Reuters. Intel's revenue is forecast to hit $10.2 billion, up 23%.

The chip maker has benefited from a stronger recovery in demand for servers and used PCs than initially expected. Consumer electronics were a bright spot of the holiday sales season, likely helping bolster Intel's fourth-quarter results.

The company's shares, which closed Wednesday at $20.96, up 35 cents, or 1.7%, have surged 67% since March, outpacing the Dow Jones Industrial Average's 63% gain during the same period. Even so, some say Intel has further to rise.

"The stock, in our opinion, hasn't reflected the earnings potential the company is likely to enjoy for the next year or two," says Doug Freedman, a senior analyst at Broadpoint AmTech, with a $29 price target on Intel. "Spending on electronics and used desktops looks far more resilient than expected."

Yet other semiconductor analysts, such as those at Bank of America Merrill Lynch, caution the optimism isn't justified. In a research note Wednesday, they cited weaker demand in Asia as one reason for "a potential disappointment" in Intel's fourth-quarter sales.

"We are hard-pressed to be positive ahead of Intel's results," they cautioned, given that expectations "have ratcheted steadily higher in recent weeks."

Meanwhile, another closely watched gauge, the company's gross margins, were projected by Intel in September to swell to 62.2% from 57.6% in the third quarter, on the high end of the company's historical range. Analysts say they are unlikely to hold up at such lofty levels next year.

"The old rule of thumb is to buy at 50% and sell at 60%," says Stacy Rasgon, a senior analyst with Sanford Bernstein. "People will be watching for that signal."

They also will be watching for how investors react, as a selloff on Intel's earnings could raise broader concerns about the vigor of the used notebooks market's rally.