Chip maker Intel (Nasdaq:INTC) is cutting costs and rolling out a series of new products in an effort to turn things around. The question is, will these actions finally make a difference and drive up the stock price?

In the second quarter of 2007, Intel's sales rose 8.4% from the year earlier quarter to $8.68 billion. Per-share profit rose 46.7% to 22 cents, but 3 cents of that came from one-time tax items. Analysts expected 22 cents, compared with 15 cents a year ago. Gross margin fell to 46.9% from 50.1% the previous quarter, and 52.1% a year ago quarter.

This result is due to pricing pressure in the lower end of the market where competition is fierce and start-up costs incurred due to new process technology. Operating cash flow rose 9.1% and free cash flow moved up 1,066.7% as capital expenditures fell.

Cost Cutting
Several years ago, Intel embarked on a strategy to reduce costs and improve plant utilization. The company cut the size of its work force to 90,300 people as of the end of the second quarter 2007. It had 94,100 employees as of December 30, 2006, while one year ago, it had 99,900.

The company has also put its existing plants under the microscope, closing those that were not part of its long-term strategy. This is helping to spread fixed costs over a larger number of chips produced, lowering per-unit costs.

These efforts are contributing to faster factory throughput, higher yields and better use of equipment. This has allowed the company to lower its future capital spending.

Also, Intel is increasing production of its latest 45 nanometer process technology. This will increase lot sizes which will lower per-unit costs even further. Startup costs were incurred in the first half of 2007 that lowered operating margins. Management stated it expects manufacturing costs to decline in the second half of the year as these costs will be much lower. This will further contribute to lower costs for the company as they ramp up production of their new products.

As a result second quarter operating expenses rose only 5.7% from the comparable quarter last year while operating income grew 25.9%. This helped increase operating income margin to 15.6% from 13.4%.

And finally in May 2007 Intel, STMicroelectronics (NYSE:STM) and Francisco Partners announced an agreement to form a new independent company by combining Intel's NOR flash memory business and STMicroelectronics' NAND flash businesses. The new company is expected to be a market segment leader in non-volatile memory solutions, serving customers in wireless communications and other segments.

Intel will own 45.1% and receive $432 million in cash for the deal. The new company will borrow the money necessary to pay the cash, which will be more expensive in today's new credit markets. Hopefully, the transaction will close by the fourth quarter of 2007, once regulatory reviews and closing conditions are met. This should eliminate a losing business for Intel, once the deal is finalized and the company is able to ramp up operations.

New Products
In the emerging markets, desktops did better than expected, causing shipment of desktop chips to grow faster. The company is still expecting higher margins in the second half of the year as manufacturing of the 45 nanometer microprocessors will ramp up, overcoming the start up costs that were incurred in the first half of the year.

Support for this growth outlook is a report from research company IDC that PC shipments are expected to grow at low double-digit rates up from single-digit rates in 2006. This growth is being driven by the continuous move to mobile computing. When coupled with the technology refresh for desktops and growth of spending for faster more power efficient servers, it is very reasonable to expect an increase in the demand for Intel microprocessors.

Intel intends to roll out new, better-performing chips every year to help solidify and expand its market share position. The company is doing well with its dual-core processors. Intel is currently the only company with a quad-core processor, with these shipments doubling in the latest quarter. The company announced it has shipped over 1 million quad-core microprocessors for servers and desktop systems, expanding its quad-core line-up to 14 different processors.

In the last quarter Intel introduced a new generation of Centrino processor technology (formerly code-named Santa Rosa) that delivers high-bandwidth WiFi connectivity and richer graphics processing. Notebook PC makers are launching more than 230 new designs for consumers and business users with this technology. Mobile computing represents 40% of shipments in the second quarter.

The company introduced the Intel 3 Series chipset family which adds new capabilities and provides manufacturers with a socket-compatible migration path to Intel's upcoming "Penryn" family of processors based on the industry's first 45 nanometer process technology. Speaking of Penryn, Advanced Micro Devices (NYSE:AMD) is about to release its first quad-core processors named Barcelona. Intel will face competition in the quad-core processor market, though it will also help Intel to encourage server and PC manufacturers to migrate to the new architecture. As yet, there haven't been any published performance comparisons of the AMD and Intel quad-core processors.

The Bottom Line
Intel has long-term potential as the company becomes more dominant in semi-conductors and grows its mobile business. The company has fundamentally changed its direction and is poised for growth. It would be attractive if it dipped down in price.

Keep in mind, this is a turnaround situation and it may take awhile for the company to correct all of its problems. However, it has overcome the pressure from AMD and is continuing to lower its costs. As Intel's new products gain acceptance in the market, the company should see growing profits and margins. So far, the market for these new products is positive, which leads one to believe now is the time to enter into a position. This is a high risk investment suitable for aggressive investors.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!