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Tickers in this Article: INTC, AMD, HPQ, QCOM, BBY
Semiconductor behemoth Intel (Nasdaq:INTC) reported results last week that put technology investors slightly more at ease regarding near-term industry trends. The stock price has continued its upward bias since the earnings release, which calls into question whether too much bullish sentiment is now being priced into the shares.

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Quarterly Review

Total sales fell 15.3% to $8 billion. The decline was less severe than management originally expected as demand improved as the quarter progressed. The company attributed this to improving PC industry shipments coupled with Intel's "strategy of investing in new technologies and innovative products."

Business PC sales continued to struggle but server volume came in ahead of projections and quarterly revenue improved 12% sequentially, which Intel stated was the largest percentage increase in the past two decades. Consumer sales have also held up better, which Best Buy (NYSE:BBY) confirmed when it reported first quarter results back in June.

A hefty $1.45 billion fine from the EU sent reported net income to negative territory to a $398 million loss, or negative 7 cents per diluted share. But excluding this charge, net income would have been an even $1 billion, or 18 cents per share. This was down 44.4% from last year's second quarter but was ahead of analyst projections, as were sales.

Management attributed the bottom-line outperformance to factory efficiency, inventory control and related cost management as gross margins improved 5.5% to 51%. (Take a deeper look at a company's profitability with the help of profit-margin ratios, see The Bottom Line On Margins.)

Mixed Industry Results

In contrast, archrival AMD (NYSE:AMD) saw second-quarter earnings come in below analyst consensus projections as sales fell 13%, which was actually ahead of expectations. However, analysts expressed concerns about its margins and recovery in microprocessor sales.

Hewlett Packard (NYSE:HPQ) reported that notebook sales fell 13% and desktop sales dropped 24%, confirming that a return to positive industry growth is still some time off.

Intel Recovers
Analysts are currently calling for full year earnings per share of 56 cents and revenue to fall nearly 14% to $32.4 billion. Based on the current share price, the forward P/E ratio is looking quite high, but earnings should recover to over $1 per share in the next fiscal year. Free cash flow generation levels are projected to be in a similar range, demonstrating that Intel generates substantial capital even after accounting for the billions it must spend annually in its capital-intensive businesses.

It also announced positive results in new sales initiatives, such as handheld mobile devices to capture a slice of the lucrative margins that industry leaders like Qualcomm (Nasdaq:QCOM) have been able to garner in the space. (To gain exposure to this sector you could explore technology funds, but evaluate the past performance before investing in these types of gadget funds, see Technology Sector Funds.)

The Bottom Line
On balance, the share price may have moved too quickly, with the market more fully discounting an industry and economic recovery that has shown few signs of becoming a definite reality. Sure, recent trends are encouraging, but the current stock risk/reward tradeoff is much less so right now.


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