INTC Does The Unexpected – Crushes Q1 Expectations – But Can It Hold These Pre-Market Gains?

by Dan April 20, 2011 6:56 am • Commentary

INTC is trading up about 5% in the pre-market which in my opinion seems about right if you consider how low the expectations were for the quarter and how strong the results and guidance appear.

-Given the stock’s under-performance relative to the major indices since last August (see my comments here) the stock should be able to gain some ground especially as investors look for some under appreciated stories in tech, which for the moment seems to be one sector that is showing some leadership in strength of earnings.

-The analyst community was generally very positive on the results as most had very downbeat expectations, and we are likely to see a few upgrades this morning.  One report by Goldman Sachs stuck out to me as their analyst seems undeterred by the results and guidance on his Neutral rating and $21 price target .   He notes that almost $500 million of the Revenue beat was from Infineon’s Wireless Solution’s segment and 1 month of MFE, so “organic revenues increased only 8% sequentially,” vs the 12% headline.  Company “attributed the revenue strength to inventory restocking, strength in emerging markets (China & Brazil) and an extra week in the quarter.”

From GS Analyst James Covello’s Note on INTC 4/20/11:

Intel returned $5 bn in cash to shareholders this quarter and is executing very well in servers. However, we see significant cyclical risk given:

(1) We believe Intel overshipped PC end demand by 12% in 1Q (Exhibit 1). As a result, we expect Intel’s revenues to correct relative to PC units over the course of the year.

(2) Intel raised its 2011 capex guidance to $10.2 bn (+96% yoy). Five out of the last six times that Intel raised capex more than 25% yoy, gross margins were down nearly 800 bp the following year due to excess supply and higher depreciation. For example, in 2005 Intel raised capex 51% yoy. In 2006, MPU ASPs were down 14% yoy and Intel’s margins were down 825 bp despite 11% PC growth. Our new $1.50 2012 EPS estimate is 31% below the Street. We are positive on Intel’s server business, which we believe will benefit from share gains as well as a higher-end mix. In addition, we believe Intel’s 3.6% dividend yield and buyback support a Neutral rating.


Yesterday I suggested a Bearish Trade Structure that would take advantage of what I thought would be a mediocre Q1 report and murky guidance for Q2.  I looked out to August to include the Q2 earnings report. With the company’s new revenue guidance of up more than 20% year over year, they have set the bar fairly high (up from their earlier mid-teens guidance) and will have to hope that demand stays firm or risk a disappointment down the road……

IBM‘s results in servers coupled with INTC’s success in the same space should give confidence, but weak consumer sales remain an issue.  I really don’t buy the Enterprise Upgrade Cycle argument that management is trying to make, my sense is that it just doesn’t happen in fell swoops anymore and is more of a great sound bite.

MY VIEW: If I were short the stock I probably would have quickly covered after the print, and take another look at the name once the dust settles……But I am long a Put Spread in August, for the main reason that I don’t like to press shorts on stocks that have under-performed into events for this very reason, if you are wrong they snap back in your face……With the August Pu Spread, my intention was to incorporate my overall bearish thesis, isolate 2 earnings events, and key technical levels in an effort to make a calculated bet on a downward move.  I have defined my risk and don’t have unlimited risk to the upside.  This Spread is likely to lose half its value, as I was dead wrong on the results, but at this point I want to watch for one very important thing: CAN INTC HOLD THE GAINS TODAY?  If it can’t and you just have a short covering rally in the name met by long selling than this wasn’t meant to be.  Financials including JPM, BAC and GS all had similar price action in the last week following solid earnings relative to low expectations, the stocks opened up and then quickly failed…..

-Last night IBM sold off after posting better than expected results and slightly raising guidance, big difference here is that IBM was trading near 52 week highs, while INTC was a few % from the lows.  A lot of good news is in the stock at these levels and this doesn’t really surprise me, I wouldn’t expect the stock to be down materially as this is a company that is executing very well, and has been for 2 years.

-If INTC can’t hold these pre-market gains then I would look to press this short at this point with the event out of the way, but remember the company is holding an Analyst day on May 17th which should be a fairly bullish event given the recent results.