Earnings Preview: Intel Corp

Intel Corp (INTC) is scheduled to announce its second quarter earnings after the closing bell on July 20.

We expect the company to report generally in line with the Zacks Consensus Estimate, as positives and negatives offset each other.

We also note that estimates for the June quarter have remained unchanged at 51 cents over the last 60 days. They had advanced 6 cents following the first quarter earnings announcement (see our detailed analysis here – Intel Posts Solid Results, Outlook).

On the positive side, we see continued strength at the enterprise for desktops, servers and notebooks, which will likely offset the continued softness at consumer. This will result in a favorable mix for the company, especially since it will have more products at 32nm. Stronger ASPs and growing utilization are other factors likely to drive the gross margin.

Demand in Asia, particularly China, remains strong, as Chinese income levels continue to increase. Intel might introduce a discounting scheme to further feed the trend.

The core business aside, Intel should gain from the Wind River and McAfee acquisitions that have helped it build software competencies and build a position in the embedded segment (TVs and other non-PC applications). The growth in this business in the second quarter could compensate for its losses on the consumer PC side.

Intel is also on top with its pace of innovation, since the company is just about ready to ship Sandy Bridge for mainstream PCs and its 22nm development activity is way ahead of anyone else in the field.

We expect Intel’s technology headway to keep it ahead of peers in terms of both pricing and performance. While there has been some noise about Advanced Micro Devices (AMD) gaining some ground at Hewlett Packard Company (HPQ) and Acer, we think these gains may not be significant for Intel, since Intel products are superior in performance and the premium to AMD is less significant that it has been in the past.

We think Intel’s main concern remains the consumer segment, where Apple Inc’s (AAPL) iPad and other tablet devices from HP, Dell Inc (DELL) and Samsung, among others, continue to cannibalize on its sales. Ultrabook’s success is yet to be proved and Intel’s attempts to develop a processor for smartphones have not really taken off.

On the other hand, recent research from IHS iSuppli states that processors based on technology from ARM Holdings (ARMH) will power 23% of all notebooks by 2015, indicating steady share losses for Intel.

Another thing to consider is the fact that Intel gained significantly from Sandy Bridge stocking up at distributors, something that may be expected to taper off as we move though the year. We think that build levels coming down, growing inventories in Asia, AMD’s gains at some customers and Intel’s own discounting policies (impacting ASPs) could start to take its toll on the company’s results in the second half.

The last 7 days have seen two analysts lowering estimates for the September quarter and fiscal 2011, indicating that analysts are turning cautious about prospects in the second half. However, since there are nearly 40 analysts covering the stock, this has not yet had an impact on the Zacks Consensus Estimate. Estimates for the rest of the year could swing down post earnings.

All things considered, we think our long term Neutral recommendation on Intel shares is justified. We also have a Zacks #3 Rank on the shares, indicating a Hold recommendation in the short term (1-3 months).

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