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Thursday, April 15, 2010

Bless you, Intel...

On Tuesday Intel (INTC) reported strong earnings for the first quarter of fiscal 2010, with the company calling it the "best first quarter ever." As I suggested in yesterday's post, tech stocks and semiconductor stocks in particular should see a nice bump. The ProShares Ultra Semiconductor ETF (USD), which we own as part of our speculative portfolio, saw an increase of 7.73%. Not bad for one day. I can only say: bless you, Intel, for pushing stocks to new highs.

Notes from the conference call --

Looking at net income, Intel recorded a sweet $2.4 billion for the first quarter, an increase of 288% compared to the first quarter a year ago. The net income beat estimates of $2.13 billion from analysts polled by Thomson Reuters. Diluted earnings per share were $0.43, beating analyst estimates of $0.38. This 13% beat is certainly meaningful.
The company recorded revenue of $10.3 billion for the first quarter, an increase of 44% compared to last year's first quarter. The numbers also beat analyst estimates of $9.8 billion by 5%

Netbooks are leveling off at about 20% of all consumer laptop purchases, CEO Paul Otellini said. As the economy improves, this will probably be a common theme, with consumers able to spend a little more for more powerful PCs. This is a good thing for Intel as the margins are typically better at the high end.

Another favorable trend as discussed by CFO Stacy Smith was in the mobile computing segment which saw strong customer demand for new products leading to an increase in mobile microprocessor average selling prices and record mobile microprocessor revenue. It would be nice if this was a larger proportion of Intel's overall sales but all trends have to start somewhere.

Gross margins were higher than expected in the quarter, reflecting both better execution and improvement in sales of higher end products. The company has seen corporate PC purchases pick up in the first quarter. CEO Otellini noted that corporate laptop populations are roughly 4 years old and desktop populations are about 5 years old. The expectation is that, as the economy improves, there will be a movement to replace these aging machines.

For owners of the stock, it is nice to see that management regards increasing the dividend a priority.

Warnings --

The company is expecting 64% gross margin, close to a record. There are many analysts who consider margins in this range to be a sell signal. The saying is: sell when margins are in the mid-sixties and buy when margins are at or below sixty.

The chart for the stock and for most semiconductor ETFs now show a big gap up after today's trading. An optimist would say that this is a sign of strength but others might say gaps are meant to be closed. Given that the coming quarter typically shows seasonal weakness, the odds of that gap closing are good.

Conclusion --

All in all, Intel turned in a great quarter, in effect making it two in a row. Favorable trends identified included a continued strength in consumer sales, above average growth in mobile segments and good potential for corporate demand to begin ramping up. The introduction of new multi-processing systems bodes well for server sales as enterprises, large and small, look to upgrade to more powerful servers, enabling companies to do more with less hardware. And the slow but steady adoption of cloud computing is also positive for servers.

Good results from Intel often presage improved results from other chip companies as OEMs purchase all kinds of other semiconductors to build gadgets and equipment around Intel's processors. This is a positive for the whole chip sector.

As I recall, though, when Intel reported good results in the previous quarter, the market eventually sold off. Today, the market registered robust gains, especially in the tech sector (which I am particularly happy to see). Let's hope other companies can keep the ball rolling as earnings season unfolds.

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