INTC’s strong 2Q12

strong 2Q results

After the equity market close in New York on Tuesday the 17th, INTC reported its 2Q12 earnings.  The company generated revenue of $13.5 billion during the three months ending in June.  That was up slightly from the $13.0 billion the company took in during the comparable period of 2011.  Earnings per share were $.57.  That was flat, year on year, but considerably ahead of the $.52 consensus of brokerage house analysts.

I wonder how real this positive earnings surprise actually was, although I haven’t been paying enough attention to the Wall Street consensus to be sure.  My sense is that the consensus was somewhat higher until rival chipmaker AMD reported very weak results a week or so ago. The knee-jerk reaction of analysts was to lower their INTC numbers.   As it turns out, INTC has been taking market share from AMD in the low end of the microprocessor market, where AMD tends to operate.

Despite weakness in afterhours trading right after the report, INTC responded to the earnings news on Wednesday by gaining close to 4%.  This, even though the company lowering revenue guidance for the rest of the year.

lower guidance for the second half

INTC now thinks its full-year 2012 revenue will be only 3%-5% higher than it reported for 2011.  That’s only about half the “high single digit” (read: 8%) sales gain it had anticipated three months ago.  The first half was up about 2%, yoy.

What’s changed?

The US and EU economies are remaining weak for longer than INTC had expected.  Emerging markets are slowing.  In response, as well as in anticipation of a buying slowdown before the debut of the Windows 8 operating system (slated for October 26), consumer PC builders are keeping their chip inventories very lean.

The lower revenues will probably clip about $.20-$.25 a share from the non-GAAP figure of $2.75 I had estimated INTC would earn for 2012 eight months ago.

profits won’t be hurt quite as much

The corporate business is strong.  The cloud is booming.  The traditional INTC consumer customers who are buying are tending to choose high-end PCs, which mean higher profit for INTC.  At the low end, INTC appears to be taking considerable market share from AMD.

On the cost side, the current lull is allowing INTC to satisfy demand and still close trailing-edge 32nm factories.  That way it can put that equipment into new state-of-the-art 22nm fabs, rather than buying more expensive new machines.  The company is also slowing down hiring.  All in all, cost savings could end up adding $.05 to second-half results.

2013 is much more important than 2012,

in my view.

2012 was always going to be a transition period.  It’s the last of several years of very heavy spending by INTC on R&D and cutting edge chip factories.  The investment is aimed at putting even greater distance in processing technique between INTC and its rivals, and at producing small, powerful, energy-stingy products that will gain INTC entry into the burgeoning market for smartphones and tablets.

Early results on both fronts are encouraging:

–the ramp-up of 22 nm is going faster than INTC had thought

–Ultrabooks are already doing ok.  140+ new designs are now in the pipeline, including 40+ with touch screens and 12 that will be tablet/laptop convertibles.  And entry level ultrabooks will be priced around $700 by fall.  So 2H12 Ultrabook performance stands to be considerably better.

–Lenovo, Lava and Orange have already launched INTC-driven smartphones.

Success in these areas is far more important for the long-term progress of INTC shares, I think, than whether 2H12 can live up to expectations formed when the we thought the economic problems of the developed world were capable of being solved by governments more quickly.

my bottom line

I think 2Q12 results and guidance underscore the idea that INTC is doing as well as can be expected in an unfavorable macro environment.  I don’t have any great insight into how successful INTC’s repositioning for mobile computing will be.  On the other hand, I think today’s stock price still assumes the worst.  More than that, I don’t think the price fully reflects the attractiveness of INTC’s corporate, server and cloud operations, considered by themselves.  So I continue to think that the stock is a very reasonable bet.


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