Will Intel Underperform in the First Quarter?

With shares of Intel Corporation (NASDAQ:INTC) trading around $21.25, is INTC an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalysts for the Stock’s Movement are NegativeIntel-logo

Intel reported its fourth-quarter and full-year 2012 results on January 17 after the bell, and like any highly-anticipated earnings report it generated a frenzy of trading activity. The stock spiked up to close 2.58 percent higher immediately before the markets closed, but has slid 6.31 percent this morning after the report was digested by investors.

Year over year, the company reported a 3 percent drop in fourth-quarter revenue to $13.5 billion, a 31 percent drop in operating income to $3.2 billion, a 27 percent drop in net income to $2.5 billion, and a 25 percent drop in earnings per share to $0.48. Intel’s operating margin also fell 6.5 points to 58 percent for the quarter.

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But all this isn’t really what pulled the stock down so much in the after market. The results actually came in ahead of analyst forecasts for earnings of $0.45 per share and $13.53 billion in revenue. The killer was Intel’s weak 2013 outlook.

Here’s what the company is expecting for the first quarter of 2013:

  • Revenue: $12.7 billion, plus or minus $500 million (a drop from $12.9 billion in the year-ago period).
  • Gross margin percentage: 58 percent, plus or minus a couple percentage points.
  • R&D plus MG&A spending: approximately $4.6 billion.
  • Amortization of acquisition-related intangibles: approximately $75 million.
  • Impact of equity investments and interest and other: net loss of approximately $50 million.
  • Depreciation: approximately $1.7 billion.

T = Technicals on the Stock Chart are Strong but Threatened

As of January 17, Intel’s stock price was 6.99 percent above its 20-day simple moving average, or SMA; 9.90 percent above its 50-day SMA; and 5.25 percent below its 200-day SMA.

Since the beginning of 2013 the stock price has been in an upward trend, rising 9.99 percent this year to date, but falling 6.28 percent year over year.

As a benchmark, the S&P 500 has risen 3.84 percent year-to-date, and has risen 14.48 percent year-over-year. Intel kept pace with the NASDAQ (in orange) until June when it started sweating value. The stock has been in an upward trend since the end of November, but its fourth-quarter earnings and first-quarter outlook threaten its momentum.

T = Trends Support the Industry in which the Company OperatesIntel_Core_i7_logo_01

Buried at the bottom of its earnings release, Intel has the standard comments on the “forward looking comments” contained in the announcement. Ostensibly, this is some legalese that ensures people don’t get too upset if Intel doesn’t meet its expectations to the penny, but it’s interesting nonetheless to see how Intel frames its own risk factors.

Among the comments: “Intel operates in intensely competitive industries that are characterized by a high percentage of costs that are fixed or difficult to reduce in the short term and product demand that is highly variable and difficult to forecast.” This is followed by some verbal positioning that suggests Intel’s margins are related to the timing of its product launches, demand is subject to market whim, and the astute observation that Intel is only successful when it responds rapidly an dynamically to its competitors.

With this as a backdrop, it’s no stretch to imagine that Intel’s mid- and long-term success will be a function of its ability to diversify. The sum of Intel’s risks factors pretty much comes out to emphasize the fact that the technology industry is a jungle where everything evolves at a very rapid rate. The successful adapt or die.

Intel’s adaptation efforts take a dozen different forms, but one recent one is, at least, very interesting, if not promising. The day before its fourth-quarter earnings release, the company announced a partnership with Facebook (NASDAQ:FB) to “dramatically change the next decade of disaggregated, rack-scale server designs.”

The company is also entering the retail solutions space, which Dell (NASDAQ:DELL), currently in the throes of possible privatization, has also decided to foray into. The move is just one more event in an ongoing trend of old-guard tech companies building a more robust set of revenue streams.

Conclusion

For the dividend hunters out there, Intel has a forward annual yield of 4.1 percent. The company is trading at a trailing P/E of 9.89 and a forward P/E of 11.69, which makes it cheaper than many of its competitors.

The last five analyst ratings changes for the stock have all been downgrades to either “Neutral” or “Underperform,” building out a pretty bearish case for the company. With the most-recent earnings in tow its hard to expect this stock to take off in the coming quarter, and many observers already seem resigned to sit on their hands until 2014.

Because of this, and the metrics mentioned above, Intel is a WAIT AND SEE.

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