Despite earnings surprise, Intel still risky

The risk in the stock still outweighs the reward at current share prices.

By Jim J. Jubak Oct 20, 2011 7:27PM
It was as much of a surprise as Apple’s (AAPL) earnings miss.

On Oct. 18, after the New York market closed, Intel (INTC) announced third-quarter earnings of 69 cents a share, 6 cents a share above the Wall Street consensus.

And the biggest contributor to Intel’s surprise was its PC chip group, which contributed $4 billion in pre-tax profit. The company’s unit focused on servers and cloud computing added $1.2 billion in pre-tax profits. And Intel’s chip group that produces low-power chips for tablets, embedded processors, and smartphones turned in a $140 million loss.

Revenue climbed 28% from the third quarter of 2010, to $14.2 billion. Analysts had been looking for revenue of $14.23 billion.

The strong performance in the data center and cloud-computing segment was expected. Growth rates in both markets are strong, and Intel has aggressively pushed new generations of server chips into the market. Its new server chip, the Xeon E5, is due to go on sale in early 2012.

But Wall Street analysts had projected much less revenue and much lower earnings growth for the PC chip unit, as PC growth slowed, under the dual pressure of a slowing economy that has kept consumer sales down and the shift from PCs and laptops to tablets and smartphones.

That shift wasn’t in evidence this quarter. Sales of chips for notebooks grew in double digits. Intel has been saying that it wasn’t seeing nearly the shift to tablets outside the United States as in the U.S. market, and sales this quarter, Intel reported, were especially strong in emerging markets.

Considering all the good news this quarter, Intel sounded a very cautious note for the fourth quarter. The company did increase its revenue guidance for the fourth quarter, to $14.7 billion from an earlier forecast of $14.2 billion. But that’s just a 3.5% addition, and Intel stressed that it was concerned about how a slowdown in European growth might lower PC sales in that market.

At the close on Oct. 19, Intel shares were just 26 cents away from their 52-week high. The stock is trading at just 10.1 times trailing 12-month earnings, and pays a dividend of 3%.

That price-to-earnings ratio is cheap, but with developed economies showing strong signs of slowing, I think the risk in these shares outweighs the reward at this share price.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Intel as of the end of June. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.

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Oct 21, 2011 11:06AM
 Intel stressed that it was concerned about how a slowdown in European growth might lower PC sales in that market.

Hot The risk in all stocks right now is slowdown or collapse of the EU economies. Intel doesn't have any larger risk than any other stock to this and less than many considering Intel's rate of expansion in emerging markets which could be cut by an EU collapse. You don't think Apple's profit and revenue couldn't be cut by an EU collapse? Watch out below.

Oct 21, 2011 11:09AM
Sounds like someone has an axe to grind.  Intel can easily raise their dividend to support their stock price should it come under pressure.
Oct 25, 2011 1:46PM
He's just saying the market has run the stock up, there's a chance to get it cheaper on a pullback.
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