When Intel (INTC 3.94%) 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 (AMD 5.22%), 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.
