After a bit of a healthy rise on Thursday, shares of Intel (NASDAQ:INTC) are falling again on news that competitor AMD (NYSE:AMD) has just released an earnings warning. Is it logical for one company to be punished when its competitor does badly? Doesn't that more likely mean that the first company beat up its competition in the quarter? We'll find out on Tuesday, when Intel releases its Q4 and full-year 2006 earnings results.

What analysts say:

  • Buy, sell, or waffle? A whopping 39 analysts follow Intel, where a bare majority of 20 rate the stock a buy, 16 more say hold, and three vote sell.
  • Revenues. On average, the analysts will be looking for a 7.4% decline in sales to $9.45 billion.
  • Earnings. Meanwhile, profits are predicted to slide 37.5% to $0.25 per share.

What management says:
It's not so much what Intel said this quarter that matters now, it seems. But rather what AMD said today -- and what industry watchers are saying about what AMD said. Unfortunately, these two conversations don't seem to make a whole lot of sense. Intel's nemesis warned of "substantially" lower profits in Q4 of this year than one year ago but noted that volume sales of microprocessors rose significantly, and the profits shortfall was due to a decrease in average selling prices (ASP). Sales, in contrast, are expected to come in 3% higher than last year.

Meanwhile, the reasons ASPs have been falling, as we well know, is because Intel has been competing on price to win back market share. In this regard, the analysts are saying that Intel appears to have been successful in winning share. Which brings us to the conundrum: If Intel was winning share, then how in heaven's name did AMD manage to increase its shipment volume "significantly"? For my part, I'll be looking for clues to answer this question tomorrow.

What management does:
Here's how Intel's been doing, profitability-wise: Gross margins continue to slide as the price war takes its toll on profitability. And the further down the income statement you go, the worse the picture gets. The minuscule 2% reduction in selling, general, and administrative costs, combined with the 5% increase in R&D spending over the past six months -- against the backdrop of a revenue base 13% smaller than last year, meant operating and net margins contracted even more than did gross margins.

Margins %

7/05

10/05

12/05

4/05

7/06

9/06

Gross

57.2

58.9

59.7

59.0

58.4

55.6

Op.

30.1

31.6

31.5

29.5

27.1

24.0

Net

22.4

21.8

22.3

20.5

18.0

16.7
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In his October update on Intel, Motley Fool Inside Value lead analyst Philip Durell shed some light on why AMD's sales and margin trends have less to do with Intel than with AMD's own problems. Specifically, Philip pointed out that the sales gains AMD is achieving through expanding its relationships with Hewlett-Packard (NYSE:HPQ), Dell (NASDAQ:DELL), and Lenovo come at a stiff price in the form of "significant discounts on bulk orders."

In comparison with Intel, Philip sees AMD as less able to absorb these lower margins because its "lesser scale and market share place it at a disadvantage in the very near term and perhaps across a longer horizon." All of which suggests that just because AMD is having a rough quarter, doesn't mean Intel will, too. Sometimes, that's the way things work between competitors. As for confirmation of that, well, we'll just have to wait until Tuesday.

Competitors:

  • NVIDIA (NASDAQ:NVDA)
  • Sun Microsystems (NASDAQ:SUNW)
  • Texas Instruments (NYSE:TXN)

Whatever happens to Intel next week, try to keep it in perspective. This article might help: "Intel Missed? Big Whoop."

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Fool contributor Rich Smith owns shares of Intel but of no other company named above. The Motley Fool has a disclosure policy.