For a company that has lost about 20% of its market value since the start of 2008, Intel (Nasdaq:INTC) is sitting pretty. The computer chip giant's first quarter wasn't the disaster many pessimists expected. In fact, Intel beat Wall Street's earnings estimates and topped revenue targets, and, even better, expressed plenty of optimism about the coming quarters. Based on the way things are headed, I'd say the stock is a lot stronger than people think.
New Information Released
By the numbers, revenue climbed 9% higher to $9.7 billion, while operating profits soared 23% higher to $2.1 billion. Earnings fell by 11% over last year to 25 cents per share, but that was the result of a larger tax hit this quarter and a 4-cent-per-share knock for restructuring and asset impairment charges.
As for the outlook, Intel said revenue in the second quarter will be $9.0-$9.6 billion. That range translates into a sequential dip, but the midpoint is just ahead of $9.2 billion which is what Wall Street has been projecting. Intel is expecting gross margins to improve sequentially during the second quarter, and even more in the second half of the year.
That expansion of gross margin ought to give investors cause for celebration. It proves that Intel, operationally, is on top of its game. After firing about 14% of its workforce in two years, shearing costs and shifting to more efficient manufacturing, Intel is now a much leaner machine, and positioned for rapid growth in emerging personal-computer microprocessors markets where the likes of Hewlett-Packard (NYSE:HPQ), DELL (Nasdaq:DELL), Lenovo Group (OTC:LNVGY), Apple (Nasdaq:AAPL) and other computer makers, which look set for robust sales growth rates this year,.
Don't forget, Intel gets about three-quarters of its revenue from outside the U.S. Strong foreign currencies and a weak dollar represents positives and negatives for Intel. With Intel chips priced in dollars, a lower dollar drives up chip demand overseas, providing Intel with further insulation from a slowing US economy. On the other hand, the lowered purchasing power of the American dollar increases the total costs.
Divide (Yourself) and Conquer
Of course, the computer memory sector isn't a great place to be doing business these days. But earlier this year Intel wisely spun off most of its flash memory operations into Numonyx, a privately held joint venture with STMicroelectronics (NYSE:STM), reducing its exposure to the troubled memory space.
I would wager Intel will extend its already hefty lead in PC microprocessors at the expense of it main competition in the area, Advanced Micro Devices (NYSE:AMD). Intel had about 76% market share in Q4 of 2007 compared to 23% for AMD. By gaining market share, Intel could offset any shortfalls from a weaker PC market and still lift its earnings. Intel, with its lower-cost chips, might win even more share if the U.S. economy's woes hit the PC market because consumers might be looking for cheap computers.
Intel's forward price-to-earnings multiple of 15 is in line with the company's reasonable 14-15% expected earnings growth next year, not including any new market share gains taken from AMD. At a share price of $22, Intel trades at about 15 times the $1.50 EPS that analysts reckon it will produce in 2009, well down from the 19 times the stock fetched back in late October.
If Intel shares can make their way back to that 19 multiple, it would mean upside of 19% for investors. Meanwhile, Intel's downside risk is minimal given the company's dominant market position, impressive operating leverage and international expansion opportunities. Even a cynic like me has to admit that Intel looks pretty attractive right now.