Earnings Preview: An Early Christmas for Intel?
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Even better, some of the indications noted by analysts signal strong sales across the board, meaning it won't be just Intel's boat that rises with this tide: It could life its beleaguered nemesis AMD (NYSE: AMD) and all other component makers as well.
Dean McCarron, president of Mercury Research, noted that sales are not going into inventories, which OEMs have let fall to very low levels.
"From what I've pieced together, it doesn't look like there's growth in balances in components. Whatever is being sold is being used to build PCs," he told InternetNews.com. "The question is, are we building too many PCs?"
One reason for that spurt in PC builds is obvious: the launch of Windows 7 later this month, which is expected to give sales a boost thanks to pent-up demand. Plus, the fourth quarter is always a strong one due to the holiday season.
Another reason for an uptake in manufacturing is more subtle. With the significant move away from desktops to notebooks notebooks are now more than half of the client computers sold, McCarron noted that means the manufacturing process has to shift as well. While desktops can be built and make their way to retail within the same quarter, it takes longer to build a laptop, which means that notebooks are usually built in one quarter and appear in retail the next.
So the issue becomes whether the big burst of manufacturing that has taken place is, in effect, borrowing sales from the future. That could lead to what resellers fear most: stockpiled inventory.
"The concern I have is OEMs are building systems for Windows 7, but what if that demand doesn't materialize?" McCarron asked. "All those systems turn into finished goods that go into inventory. Then what?"
The answer will likely come on Oct. 23, when retailers report first-day Windows 7 sales.
Intel charging ahead
FBR Capital Markets issued a report on Monday that it expects third-quarter revenues of the 24 chip stocks it follows to be up 12 percent sequentially from Q2, and Q4 will grow another five percent sequentially.
A decline in Q4 would indicate cutting back in advance of Q1 2010, when the industry typically slows down. FBR, like McCarron, is also concerned about the channel being overbought.
"There are increased risks that there has been a PC build-ahead and that the PC supply chain has slightly 'overheated' due to the Oct. 22 launch of Windows 7, and due to higher lead times and some component tightness in optical drives, hard drives, and DRAM," analyst Craig Berger wrote in his research note.
The company cut back on its PC projections, in particular, it downgraded AMD. "We do not want to get overly bearish on the PC space given improving global demand and still-unknown holiday sell-through trends, but we feel these actions are prudent," Berger wrote. "Indeed, investors may want to focus on enterprise and communications-exposed chip firms for 2010."
FBR is still bullish on Intel, though. The firm raised estimates on Intel, with estimated 2010 GAAP EPS increasing from $1.20 to $1.40 and its price target increasing to $23 from $21.
FBR believes Intel's third-quarter revenues will likely be at the upper end of its guidance range of between $8.8 billion to $9.2 billion, and that its margin will be closer to 55 or 56 percent vs. 53 percent, as originally projected.
It expects Intel's Q4 to be in the range of $9.7 billion to $10.3 billion, better than Wall Street estimates of $9.5 billion, putting Intel almost back where it was before the economic collapse last year. Intel's gross margins could hit 58 percent thanks to higher factory utilization rates.
Market growing overall
FBR's PC build checks continue to grow. It now projects Q3 PC builds by top OEMs to grow 24.5 percent sequentially from Q2, versus its prior forecast of 22 percent last month and 18 percent in mid-August.
For Q3, notebook units grew 28 percent from Q2, versus 25 percent projected last month. At the same time, desktop shipments are up 19 percent, compared to 17 percent last month. Its sources credited Microsoft's (NASDAQ: MSFT) Windows 7 launch, Hewlett-Packard's aggressive rollout of new netbook models, and increasing interest in Consumer Ultra-Low Voltage (CULV) notebooks.
It also found that HP's build upside is more robust than that of its primary competitor, Dell. HP (NYSE: HPQ) has a more global reach than Dell, and also has more of a consumer effort than Dell, which is primarily aimed at business. This would indicate a continuation of the trend toward greater strength overseas than in the U.S., and in consumer buying versus businesses.