$INTC Q4 Earnings Preview

by Dan January 16, 2013 12:50 pm • Commentary

EVENT: INTC reports their fiscal Q1 tomorrow after the close.  The options market is implying about a  4.2% move following the print vs the 4 qtr avg of ~2.65% and the 8 qtr avg of ~3%.

SENTIMENT:  Wall Street analysts are fairly mixed on the name with 18 Buys, 26 Holds and 7 Sells, with an average 12 month price target of only 22.78, or just 4% higher than current levels.  Short interest as reported last month sits near a 12 month high at ~4.5% of the float.

FUNDAMENTALS / VALUATION:  Over the last week technology research firms IDC and Gartner  issued reports suggesting that Q4 PC shipments were down btwn 4.6% and 6.4% respectively year over year, this below seasonal quarter follows Q3 that was also below normal seasonal trends.  INTC’s stock    suffered in the second half of 2012 as it became apparent that they were very poorly positioned in the emerging tablet space, that is currently creating  serious headwinds for pc refresh cycles, particularly in ultrabooks.   When INTC reported their Q3 back in Oct, they guided Q4 margins to 57%, the lowest level since Q3 2009!  Many analyst do not see an uptick back above 60% till the back half of 2013. 

The stock is fairly cheap trading at 11x 2013 expected earnings, but the wrinkle here is that they are slated to decline 7% this year and then grow 8% in 2014, while sales are only expected to grow 2% and 4% respectively.  The stock has a dividend yield of 4.09%, a strong balance sheet with 13% of their market cap in cash (6.5% net of debt).   It is hard hard to make too many arguments from a fundamental stand point to step in and buy the stock heading into a seasonally weak period where that the company will slosh through with a lame duck CEO (back in Nov Otelini announced his retirement in May).

TECHNICALS / PRICE ACTION:  Since making fresh 18 month lows back in Nov, the stock has rallied almost 15%, half of which has come in 2013.  On a near term basis the stock is hovering around a resistance level that it broke down from in Nov.  From purely a technical level, the stock appears to be in no man’s land, almost at the midpoint of the 5 month range.  $19-20 should serve as serious support, while $24 should be serious resistance.

[caption id="attachment_21623" align="aligncenter" width="490"]INTC 2 YR chart from Bloomberg INTC 2 YR chart from Bloomberg[/caption]

VOL SNAPSHOT: The real story in INTC vol is the differences between the Jan19 weeklies and the rest of the months. Jan weeklies are trading at 62 vol while the Febs are at about 25 vol. Here’s that monthly skew with Jan19 weeklies in red:

[caption id="attachment_21611" align="aligncenter" width="432"]Screen Shot 2013-01-16 at 9.11.18 AM Monthly Skew from LiveVol Pro[/caption]

Now obviously alot of that skew comes from the fact that the Jan19’s are so dollar cheap. And Feb and the other months will come in following the event. But if we look at Feb and the other out months in the long term, we see that Implied vol across all months (red) is actually below its historical average (yellow):

[caption id="attachment_21612" align="aligncenter" width="634"]Screen Shot 2013-01-16 at 9.17.16 AM IV30 (red) vs IV360 (yellow) from LiveVol Pro[/caption]

Expect to see the out month vol come into the low 20’s following the event.

MY VIEW:  Despite what appears to be a very lackluster holiday PC selling season, and secular headwinds from the popularity of tablets and smartphones, INTC is a tough press here on the short side as the stock is cheap, and new C-level leadership in the coming months could bring new optimism about the company among investors looking for potential cyclical growth in tech after being viewed as merely a value stock.  That being said, sales growth is not likely to come soon, and the company may need to make a sort of transofrmative acquisition that helps that make a meaningful push into the mobile/tablet space.  My sense is that the stock is up or down .50 to $1 after the print, and calendars could make the most sense, selling what appears to be a high implied move.

We may put on a trade before the close tomorrow, so stay tuned.