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Intel’s Second Quarter Results Were Mixed; The Stock Still Looks Cheap

publication date: Jul 17, 2012
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author/source: RJ Towner

Global chip maker Intel (click ticker for report: INTC) reported stronger than expected earnings Tuesday afternoon in spite of soft global economic growth. The firm earned $0.54 per share versus the $0.52 per share that the Street was expecting. Revenue grew 4% year-over-year to $13.5 billion, but came in slightly shy of expectations. Top-line growth suggests the firm is taking share from rival AMD (click ticker for report: AMD) without slashing prices too much. Intel also posted a strong gross margin of 63.4%, down from the first quarter’s 64% gross margin but on the higher end of the firm’s guidance range.

Not surprisingly, performance was inconsistent across geographies. Revenue in the Americas fell 1% year-over-year due to weaker demand as a result of low inventories and soft PC orders. The firm expects seasonal weakness in North America as users wait for the release of Windows 8 (click ticker for report: MSFT) before upgrading their hardware. Yet, with the release of the Surface tablet and unexpected popularity of Windows 8, we could see the firm experience better than anticipated demand in the fourth quarter. Revenue grew 6% in Europe and 5% in the Asia-Pacific region, year-over-year, though both could suffer from lower demand in the back half of the year, in our view.

In addition to geographical differences, Intel experienced varying performance across its different business segments. The PC Client Group, which is by far Intel’s largest segment, saw sales grow 4%. The firm attributed this acceleration to unit demand growth (up 7% on a year-over-year basis), which offset slightly lower average selling prices (down 2% from the same period last year). We think this group could face headwinds in the third quarter.

Conversely, thanks to the explosion of data, the Data Center Group grew revenues 15%, to $2.8 billion. Enterprises continue to invest in data storage, a trend we do not see decelerating as the amount of data is practically growing daily. The firm’s software group also grew revenues 15% compared to the same quarter last year and swung from a $14 million loss to a $14 million profit. We think the firm’s investment in McAfee and its subsequent security integration with Intel hardware continues to accrue to the bottom line.

Though we think the firm’s second quarter was strong, Intel’s outlook for the third quarter and fiscal year are a tad weaker than we previously anticipated. Intel guided to 3-5% revenue growth for 2012, down from its previous mid-single-digit range as a result of softness in North America and lower than anticipated global economic growth. R&D (including M&A) spending was also cut by $100 million, though the firm will still spend $18-$18.4 billion on capital investments. We admit the global economic outlook looks grim for the remainder of the year, but we still wouldn’t be shocked to see Intel exceed its conservative internal targets.

Even if global economic growth remains sluggish going forward, we have little doubt that Intel will be able to successfully navigate difficult times. The firm’s consistent investments in its own technology and acquisitions of complementary businesses have proven to be a winning formula over the past few years. We expect this trend to continue. Ultrabooks, the launch of Ivy Bridge and Windows 8 are compelling catalysts that will surface in the back half of this year. Additionally, Intel continues to be very shareholder friendly—shares yield 3.3% at current levels and the firm has bought back gobs of stock ($1.1 billion during the most recent quarter). With its mobile business ramping up and the firm stealing share from AMD, Intel is poised to remain a dominant player in the chip industry for years to come. We think shares are significantly undervalued, and we hold the chip maker in our Best Ideas Newsletter.


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