the quarter

I listened to the INTC 2Q2010 conference call last night.  The three-month period established a whole raft of new operating performance records.  Earnings per share came in at $.51 vs the analysts’ consensus of $.43.  Six-months’ eps was $.94, with the seasonally stronger second half just beginning.  $2 a share for the year, a number I would have thought six months ago would be impossible for the company to reach, now looks achievable.  from the way the usually cautious company management is talking, next year could be 20% better.

The most important message from the INTC quarter to Wall Street is, I think, that corporations are in the early stage of what could be a significant capital spending boom–implying they see their profits starting to accelerate.  In particular, the US, a laggard to date, is beginning to perk up.

the details

1.  Revenues were unusually strong, at $10.8 billion.  This is up 5% quarter on quarter at a time when typical seasonality would have called for a 2% revenue drop.

All regions of the world were unexpectedly strong.

Consumer notebook sales remained brisk, but the real boost to the quarter came from business customers.  Several aspects to this:

–companies are starting to adopt Windows 7 and are replacing their wretchedly old PC stock as they do so

–firms are also feeling good enough about their prospects that they are buying more powerful, higher-end (read: more profitable for INTC) products

–the server mix is also improving both because companies have more cash to upgrade and because the internet data center business (growing 170% yoy) is booming.

2.  INTC has increasingly good control of costs.  Gross margin was a record 67% in the quarter, which was about four percentage points better than in the first three months of the year.  Virtually all of the increase came from lower-cost manufacturing.  Only one point came from the effect of higher sales.  INTC sees no reason for the margin to contract from this level any time soon.

3.  Customer inventories are low.  The Iceland volcano, sovereign credit worries in the EU and the consequent decline of the euro caused Europe-oriented OEMs and distributors to run down stocks.  End demand from big businesses is unaffected, however.  Distributors are busily reconfiguring machines–less memory, less sophisticated graphics–to try to keep consumer price points from moving up too much.  At some point, presumably during the second half, customers will likely bring stocks up to normal levels, creating extra demand for INTC chips.

the second half–and beyond

1.  Customer reviews of INTC’s next family of chips, named Sandy Bridge, have been the most favorable in some time.  As a result, INTC is accelerating Sandy Bridge’s introduction–suggesting INTC believes corporate demand will continue to be strong for at the very least the next year.

2.  The Atom chip is plateauing, although the introduction of dual core Atoms spurred 16% quarter on quarter growth in June.  The next market for this chip is likely imbedded devices, like Google TV, DVD players and set-top boxes.

tablets

Unlike AAPL, which never saw a netbook it didn’t hate, INTC appears very relaxed about the introduction of tablets.  The company thinks that the netbook was a much bigger threat to cannibalize notebooks.  Given that the category proved additive to the overall mobile business, it expects the same to be true for tablets.  At this point, it’s hard to know whether INTC will have that much presence in the tablet category, but there are at least 30 Atom-configured tablets being displayed at trade shows.

conclusions

At potentially 10x next year’s eps, and yielding 3%, the stock looks cheap to me (I don’t own it, though).   My sense is that the Wall Street consensus thinks 2010 is a cyclical peak for INTC’s earnings.  My guess is that the peak, if there is going to be a significant high point followed by a sharp decline, isn’t until 2012.

Sales to corporations are going much, much better than the company thought several months ago.  This is a positive statement, not only about business confidence, but also about how firms have raised their forecasts of their own revenue and profit prospects for this year and next.

INTC is boosting its estimate of its tax rate for 2010 from 31% to 32%, since it now anticipates a greater proportion of its business than it earlier expected will come from high tax-rate areas (read: the US).  I think this is a very bullish sign for Wall Street that most analysts will probably overlook.