Event: INTC reports Q3 guidance tonight after the close. The options market is implying about a 4% move on earnings, vs the trailing 4qtr avg move of about 3%. The move appears to be oddly high when you consider the company already cut their sales forecast for the quarter on Sept. 7th, 2012.
Price Action: Since the negative warning on Sept. 7th, the stock is down about 11%, trading only about 2% from the 52 week lows made last week. INTC is down 10% ytd vs the SOX that is up 8% ytd.
Sentiment: Wall Street analysts are fairly mixed on the stock with 23 Buys, 27 Holds and 6 Sells, and an avg 12 month price target of of $25.86. Short interest sits at about 3.7% of the float. One of the best indicators of sentiment in my opinion is the rate of change of earnings estimates by analysts. The chart below shows that after INTC’s Q1 report in April, and after their Q2 report in July, estimates came down modestly as the company in both instances disappointed on one metric or another, but the stock still held in. Estimates had been trickling lower in late August after disappointing results from DELL and HPQ, but the boom really came down after the earnings pre-announcement in early Sept.[caption id="attachment_18004" align="aligncenter" width="490" caption="INTC earnings estimates vs price from Bloomberg"][/caption]
Technicals: For nearly the first half of 2012, INTC benefited from investors nearly desperate search for yield and safety. With its rock solid balance sheet and low valuation, INTC appeared to be easy pickings. The stock made new 8 year highs back in early May the same day that the SPX made new multi-year highs. The one year chart below shows the massive $25 support level that held for most of 2012 until late August.[caption id="attachment_18007" align="aligncenter" width="490" caption="1 Yr INTC chart from Bloomberg"][/caption]
The five year chart below shows the August Break-down below the $25 support level, but more importantly shows the break below the uptrend that has been in place since the 2009 lows. The redline shows the next real long term support at $20, or about 8% lower from current levels.[caption id="attachment_18006" align="aligncenter" width="490" caption="5 YR INTC chart from Bloomberg"][/caption]
Valuation: For those looking to find inputs to reinforce a bearish thesis, given current estimates, valuation isn’t likely to be a catalyst at first glance. But for a company which saw record earnings in 2011, which had doubled from 2009, the stock at ~10x expected 2013 and 2014 the stock isn’t exactly cheap relative to expected growth btwn a measly 1 and 2% a year.
Volatility: Since the stock retreated from 8 year highs back in May, realized vol has picked up a tad after nearly matching 2 year lows below 15 in April.[caption id="attachment_18008" align="aligncenter" width="490" caption="INTC 30 and 60 day Realized Vol vs 30 day Implied Vol"][/caption]
The chart below shows INTC’s 30 day implied vol and what happens to it prior and after earnings over the last 4 quarterly reports. The only real difference I see is the fact that Implieds had such a sharp rise following the Sept 7th earnings pre-announcement, But I guess the main take-away is that while they usually rise to current levels prior the event, they usually fall to at least 20 following.[caption id="attachment_18009" align="aligncenter" width="490" caption="INTC 30 day Implied Vol Over the Last Year from Bloomberg"][/caption]
Fundamentals: All you have to do is look at the charts of most semiconductor stocks who are heavily exposed to PCs to know that these aren’t great times to have little diversification to smartphones and tablets. INTC and AMD are exhibit A for such woes. Last week market research firms Gartner and IDC issued Q3 PC shipment forecasts that were dreadful, up 3% quarter of quarter (way below seasonal) and down 8.3% year over year. Some analysts feel that some of this demand was likely pushed back as buyers waited for Windows8 release in Nov. This will likely be one of the most important issues to be adressed on the earnings call.
Investors also remain concerned with INTC’s own margin guidance which is only down modestly from their recent record performance in the mid 60s %. Product pricing remains a massive issue with investors as obvious weak demand has led to high inventory levels, and AMD’s position becomes more perilous by the day on of the only ways they may be able to compete with INTC is on price. Lastly, INTC has a strong foothold in the UltraBook segment which has been an area of growth, while they have had little effect in tablets, it appears apparent that tablet pricing will drive down UltraBook pricing and thus be another drag on a poorly positioned INTC.
MY VIEW: So what’s in the stock at current levels? My sense is a good bit of the above is probably “baked in the cake” so to speak. With the stock down 10% on the year it would take a meaningful guide down for Q4 to see the stock test the crucial $20 support level noted above. The stock’s 4% dividend yield (nearly 2x that of the SPX) and active share buyback should help to buoy investor demand at depressed levels, basically, it becomes a harder short the lower it goes. Looking at the following excerpt from INTC’s Investor Relations website, given last year’s purchases when the stock was at similar levels, I would expect the company to be large scale buyers on any further weakness: