10:06 ET
Intel (INTC):
20.11 -0.38: Intel dropped the bomb today that many pundits had expected them to drop. Specifically, the world's largest chip maker cut its first quarter revenue outlook to $8.7-9.1 billion from a prior forecasted range of $9.1-9.7 billion. The reasons cited were weaker than expected demand and a slight market segment share loss. Because of the change in revenue expectations, gross margins will be adversely impacted.
Reading between the lines, it is clear that Intel is still losing share to Advanced Micro Devices (AMD) - a development we think that has a lot to do with capacity limitations that should ease in the second half of the year. In terms of Intel's comment about demand, it is sure to stir ongoing concerns about Dell's (DELL) business and average selling prices for microprocessors as Intel manages its inventory growth.
The news from Intel can't be labeled anything other than bad, but we're not expecting a Google-like fallout for several reasons. First, as noted above, it isn't entirely a surprise. In the past few weeks, a cadre of analysts have issued notes expressing the likelihood that Intel will cut its guidance. Just yesterday, in fact, we heard that Merrill Lynch was cutting its estimates for Intel on the basis of concerns about a pre-announcement. On Wednesday Bear Stearns cut its estimates following channel checks while Stifel Nicolaus cut its price target for Intel (to $30 from $35), saying it believed Intel suffered through a much weaker than expected January and that it was likely to come in at the low end of prior guidance at best (Intel's revised guidance is spot-on with Stifel's view).
Secondly, Intel's stock has come down hard already, with the catalyst being an earnings miss for the fourth quarter, first quarter guidance that was also below the consensus estimate at the time, a concession that it lost share to AMD, and news that it will no longer provide mid-quarter updates. Since that report in January, shares of INTC have dropped 20%. Consensus EPS estimates have also been dropping. According to Thomson Financial, the first quarter consensus EPS estimate has come down ten cents in the past 30 days to $0.27 while the FY06 consensus EPS estimate has been revised to $1.23 from $1.63 in the same period.
At its current price, Intel trades at approximately 14x trailing twelve month earnings, which is a 53% discount to its 10-yr historical average of 30x. Granted it's a hard sell pushing Intel these days, but for the long-term investor, it is times like these that afford them an opportunity to pick up an industry leader at a discounted price. Owning Intel may not produce big returns over the near-term, but with the ramp of its dual core processors throughout the year, its financial strength, its technological leadership, and its brand equity, Intel is a name we'd want to own at these levels, which is why we have it as a suggested holding in our Active Portfolio.
--Patrick J. O'Hare, Briefing.com
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