Intel’s record 3Q11


INTC announced 3Q11 earnings after the close of trading in New York on October 18th. The report was records all around.

Revenue for the three months was an all-time high of $14.3 billion, up 29% year on year.  Net income was another first, at $3.7 billion, up 24%.  So, too, were eps, at $.69, up 33%.  (Why the difference between the percentage gains in net and eps?  …INTC’s continuing aggressive stock buybacks, which have shrunk the number of outstanding shares by 354 million over the past 12 months.  During 3Q11, INTC bought back 186 million shares at an average price of $21.50.)

These results also blew away the Wall Street analysts’ consensus of $.61 for the quarter.

INTC gave guidance of 4Q11, sketching out a quarter pretty much a carbon copy of 3Q11.  That’s a bit weaker than normal seasonality, but softness in the developed world PC business, especially in the EU, has kept the company from being more enthusiastic.


Actually, this is more “new information” than “details.”

How could analysts miss INTC’s earnings so badly?  After all, the company’s overall business isn’t growing at warp speed.   INTC is also deeply connected into the supply chains of its customers, lead times are long enough for it to see much of the coming quarter, and the company tells analysts in advance what it is seeing.

The issue is INTC’s mainstay PC business–which grew by 17% year on year during 3Q.  This performance was based mostly on strength in emerging markets like China and Brazil.  It also contrasted sharply with predictions from third-party research firms that have been saying the global PC market is barely growing at all.

INTC says these firms are systematically underestimating demand.  They have a good handle on the PC market in the developed world, but don’t have good sources in developing countries, where consumers are just becoming affluent enough to afford PCs.  In such markets, PC demand is booming but the consultants can’t see it.

Analysts have so far chosen to believe the consultants, not INTC, and have been projecting a stagnant PC market.

INTC’s 4Q11 caution?  It stems from two factors.  Demand in the EU is weak.  Slowdown in global growth has lowered airfreight rates enough that PC vendors are shifting from ship to air for sending their output to market.  Faster delivery allows PC makers to trim finished goods inventories further.

New chips?  INTC will be churning out 22nm 3-D chips in volume by yearend.  The company thinks that this will give it attractive alternatives to ARM chips for low-end PCs or tablets-maybe even smartphones.  INTC’s offerings can sell at the same $30 price as ARM’s but be faster, smaller and use less power. They’ll also already be compatible with all a potential customer’s existing technology.  If so, INTC may be able to compete successfully with ARM for the first time ever.

what about 2012?

My rough guess is that INTC earnings will be up, and by around 10%. 

INTC thinks corporations are only about halfway through their upgrade from Windows XP to Windows 7.  Initial demand for the company’s newest server chip, which will debut early net year, already has 2x the design wins and 20x the demand that today’s standard had at launch.   Cloud computing, which is still a small business for INTC, is growing by leaps and bounds.  These users demand the newest, highest-performance and highest-profit server chips INTC makes. Assume this all adds up to 20% growth for a third of INTC’s business.

For the traditional consumer PC business, let’s say the developed world and the developing world are about equal size today.  For 2012, assume that the developed world be flat and the developing world will slow down to 10% growth.  That would mean 5% growth for two-thirds of INTC’s business.

Add the two together and growth for 2012 will come out to +10%.  Stock buybacks will probably add a few percentage points to that number.  Eps would probably be slightly above $2.50 for this year and would come in at $2.75-$2.80 for 2012.  The consensus brokerage house estimate is at $2.45.

There’s some risk that demand in developed markets will decline next year.  But I think the fall would have to be more than 10% to make an appreciable change to the overall company’s fortunes.  On the other hand, it’s possible that INTC’s new 3-D chips will allow it to gain tablet or smartphone design wins–something that Wall Street now finds impossible to believe.

investment thoughts

At today’s share price, INTC is trading at 9.4x current earnings and 8.5x earnings for 2012.  It’s yielding 3.5%.  I’m tempted to write that the stock is priced like a business cycle-sensitive industrial at the top of the cycle–but even stocks like CAT and DE are selling at higher multiples than INTC.

That’s actually part of the positive investment case for the stock.  It’s priced as if all that matters for it is the consumer PC business in the US and EU, that these markets are in secular decline and that INTCs attempts to adjust its offerings to a smartphone- and tablet-driven future will fail.  So downside risk seems to me to be limited.  Upside could be considerable if INTC’s new 3-D chips do what the company thinks they can.

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