Could Intel Deliver an Earnings Blowout?

When Intel (NASDAQ: INTC  ) issued its full-year 2014 revenue and operating profit guidance, investors weren't all too pleased. To provide some perspective, Intel generated $12.9 billion of net income during 2012, $11 billion in 2012, and a mere $9.6 billion during 2013. While 2014 hasn't been written yet, investors are bracing for yet another year well below both 2011 and 2012 levels. The question now is whether Intel can deliver an upside surprise to put a bit of a spark back into its share price.

What is Wall Street expecting?
The first thing to keep in mind is what the analysts covering the stock expect for the year. Now, for a company like Intel, which actually issues full-year guidance, the analyst estimate spread is usually pretty tight (i.e., within the range that Intel gave). This means "consensus" usually works out to something very close to the midpoint of management's guidance.

For the full year, consensus is $53.14 billion in sales (+0.80% year over year) and earnings per share of $1.85 (-2.11% year over year). This suggests that, on the whole, investors are expecting the company to perform in line with management's expectations. This leaves Intel valued at about 13.5 times the current year's earnings and about 12.5 times the analyst consensus for 2015 -- so the stock is actually pretty cheap.

Could Intel beat?
Management's expectation (and therefore consensus) is based on the following critical assumptions:

  • PC Client Group sees revenue down "mid-single digits" (this usually means 5%-7%), operating profit flat to 2013.
  • Datacenter group revenues up 10%-15%, with the bottom line growing faster than the top line.
  • Other IA revenues roughly flat with operating profit down (due to increased tablet contra-revenue and a down modem business).

So, given that the PC Client Group made up about $33 billion of the company's $52.7 billion revenue base achieved in 2013, this is very clearly the biggest "lever" that could influence an earnings beat. The next largest one, the datacenter group, was worth $11.24 billion during 2013, with growth estimates in the 10%-15% range. Following enterprise weakness in Q4, CFO Stacy Smith seemed to be fairly pessimistic on the call, setting investor expectations for the low end of that range.

If you do the math on the top line and assume a 6% PC decline year over year for Intel (so from $33 billion to about $31 billion), Intel will be making up the difference of $2 billion in aggregate from its other businesses to get to flat. If the datacenter group grows 12%, this would make up $1.35 billion of the $2 billion difference. Intel indicted that directionally, software and services and NAND would be up during 2014, suggesting that these make up the remainder of that roughly $650 million deficit.

What happens if PCs are only down 3%?
The current forecast from Intel and the various third parties is that the PC market will be down 6%. However, let's assume Intel is able to:

  • Drive a richer mix (particularly in desktop and high-end notebook).
  • Take share from AMD (NYSE: AMD  ) , particularly in the low end (Intel's Bay Trail-M will get the ball rolling; future generations could really drive the point home).
  • Since Intel puts full "Core" processors inside of higher-end convertibles/laptops (and since the revenues are booked under the PC Client Group), Haswell/Broadwell based tablets could also drive upside.

Let's assume that all of this rolled together leads to a revenue picture in which PC Client Group is down only 3% year over year. Further, let's do a little math to figure out the impact this would have on Intel's operating profit:

PC Client Group

2013

2014 Guide

2014 Upside (assuming PCCG 3% rev. decline)

Revenue (in billions $)

33.03

31.03

32.03

Operating Profit (in billions)

11.8

11.8

12.17

Operating Margin (%)

35.7%

38%

38%

Assuming these results, Intel could actually come in over $1 billion ahead on the top line against consensus and -- assuming a tax rate of 27% -- beat current EPS estimates by about $0.07 and register mild year-over-year growth. Of course, assuming such a revenue beat wouldn't be a one-time thing (i.e., the PC refresh cycle is near its peak as Windows XP end-of-life is in full-swing) and that the PC market could eventually return to growth, Intel's shares could be repriced to command a much richer multiple than it does today.

Foolish bottom line
Investing based on hope is foolish (not Foolish), but given that Q4 already gave investors a positive PC data-point, and that PC sales in developed markets appear to have stabilized, it may not be out of the realm of possibility for Intel to beat the current PC market consensus and deliver meaningfully better results on the top line than is currently expected. When the Q1 results are in, on April 15, we'll be able to get a much better grip on the current Intel picture. 

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Read/Post Comments (8) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2014, at 8:40 PM, keeperoftheq wrote:

    You are assuming an awful lot. Other companies will have far better than expected revenue. Like AMD. This will be due to Sony and Microsoft selli8ng million more game consoles that expected. Also look for guidance to be above estimates.

    Components suppliers have reported that the usual Q3 increase in demand has hit in Q2.

    Going forward Investors must be concerned about the $1 billion + Intel will be giving away in rebates in an attempt to gain market share in the mobile space.

  • Report this Comment On March 24, 2014, at 9:26 PM, techy46 wrote:

    I'd be inclined to think Intel won't beat in the next 2-3 quarters.

  • Report this Comment On March 24, 2014, at 9:55 PM, masterwallstreet wrote:

    In my opinion only, I think Intel will tank for several reasons. Reason #1 they lack vision. Reason #2 they are overpriced and overvalued. Reason #3 their product is overpriced and overvalued. Reason #4 insiders are selling. Reason #5 they are losing a lot of their revenue to their competition AMD. AMD has a superb product at a superb price. Their graphic cards are being sold to gamers, industry, military and medical uses. They have the fastest CPU chip going at a superb price. They are in four leading game consoles. AMD stock is undervalued and underpriced. Let us do a comparison. If you compare Intel to AMD, AMD is the better investment. The new rising giant AMD the new fallen giant Intel. My opinion I think AMD will blow earnings out of the water. Intel will sink like a rock.

  • Report this Comment On March 24, 2014, at 10:43 PM, rav55 wrote:

    I read the headline and thought only Ashraf. Now lets see what happens.

  • Report this Comment On March 24, 2014, at 11:21 PM, fearandgreed2005 wrote:

    Masterwallstreet,

    You crack me up. Keep those opinions coming.

  • Report this Comment On March 25, 2014, at 10:51 AM, drborst wrote:

    Ashraf, You're better when you write about technical details. This one feels wishful (if PCs decline by 12%, then a miss is in the cards). and the typos get me. (2nd sentence, 12.9 billion in 2012 and 11 billion in 2012), and what does this mean?

    <<Intel indicted that directionally, software and services and NAND would be up during 2014>>

    Indicted? Directionally? And really, does anyone have a clue how much Intel makes from IMFT (and can't someone figure it out by looking at MU's half of the venture?)

    DRB

  • Report this Comment On March 25, 2014, at 1:27 PM, roguesisland wrote:

    TO masterwallstreet,

    Those five reasons are coincidentally [replace AMD with Android, Tizan]... Apple.

    AMD by the way is a mere niche player now with it's fabless model, in other words, they rely on bigger fish [like Microsoft] for their rev stream. Intel IS the biggest fish.

  • Report this Comment On March 27, 2014, at 10:38 AM, MeirElazar wrote:

    For anyone who wishes to understand Ashraf Eassa’s motivations and methodologies, I suggest you examine his article entitled “AMD Looks Finished” along with all of the reader comments. It was published on March 20th, 2014 in Seeking Alpha.

    http://seekingalpha.com/article/2099473-amd-looks-finished?i...

    I would particularly like to point out all of the comments relating to Ashra’s deletion of peoples comments. It indicates that Ashraf has comments of people opposing his view deleted, censored, and purged.

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