Intel Earnings Preview: Will There Be Growth?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Intel (NASDAQ: INTC), the world’s largest chipmaker, has done very well over the past few years.  The stock has rebounded nicely since the 2008-09 lows of around $12, buybacks are nicely reducing the number of outstanding shares, and the company has been constantly increasing its dividend to the bond-like 4.25% it currently yields.  With the company set to report earnings next Thursday, investors will be watching for signs that either Intel is “maxed-out” or that there could be more gains ahead.  I believe it is the latter, however first let’s take a look at the company and what it does.

 

 

Intel sells primarily CPU’s (central processing units), which are the brains of computers.  They have dominated this area so effectively and for so long, that “Intel Inside” became a widely recognized phrase by the early ‘90’s.  Intel operates through three segments, which each produce microprocessors for different applications.  The PC Client Group (66% of sales) produces the most common Intel processors for notebooks, netbooks, and desktop computers.  The Data Center Group (19% of sales) makes processors and other products for servers, workstations, and storage centers for cloud computing.  Finally, the Other Intel Architecture Group (15%) includes Intel’s smaller businesses such as the Ultra-Mobility Group, which produces chips for mobile Internet applications.  I believe this segment will account for most of Intel’s growth in the coming years, as tablet PC’s, smartphones, and other mobile devices are an area that Intel is yet to capitalize on. 

To further put in perspective how dominant Intel is, the only other significant competitor, Advanced Micro Devices (NYSE: AMD) has a market cap that is about 2% of Intel’s.  The company is planning the launch of its fourth-generation of “core” processors and just recently demonstrated them at CES 2013 last Monday.  While the release of these processors alone should fuel sales at Intel, a huge catalyst later this year is the new processors’ incorporation into the refreshed versions of Apple’s (NASDAQ: AAPL) MacBook Pro and MacBook Air, which should provide a nice boost to Intel’s sales during the latter half of the year.  Pay specific attention to any updates regarding the fourth generation processors and especially their use in Apple products.  The new processors are specifically designed to significantly extend battery life in laptops, an area Apple is usually known for (my MacBook has at least twice the battery life of my Acer). 

Consensus estimates call for $0.45 per share for the fourth quarter and $2.11 for the year.  In my opinion, it is especially important for the earnings to at least match these expectations, as Intel is not used to bad earnings news.  Over the past 12 quarters (three years), the company beat earnings eight times and met expectations four times, with no misses.  This has a lot to do with Intel’s good performance, however any bad news could be particularly devastating, especially with the concern in the market about lower PC sales with the transition to tablets and mobile devices. 

To sum it up, while I believe Intel is very fairly valued at just 10 times 2012 earnings, investors will be looking to the company to address where growth is coming from going forward.  As I mentioned, there are a lot of people nervous about the direction of the PC market.  In order for the stock to react well to the earnings release and conference call, Intel must address not only its plans for its new processors in regards to PC sales, but its plans to further grow their mobile device chip business, which in my opinion could very easily become the dominant method of computing in the next decade or so.


KWMatt82 owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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