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It seems the picture is getting clearer for many analysts on the outlook for semiconductor industry leader Intel (INTC). The further along we get into the fourth quarter, the worse it seems. We already know that Intel lowered guidance last quarter and that it has higher inventory levels which is not good when PC sales are losing ground to tablets. We also know that competitors like ARM Holdings (ARMH) are taking market share away from Intel in some higher margin areas. In the most competitive segment, x86 PC chips, Intel is seeing pricing pressure from Advanced Micro Devices (AMD) which is another semiconductor maker that has seen its stock price plunge to 52-week lows in recent weeks.

Hans Mosesmann, an analyst at Raymond James, recently cut Intel to a sell and he is predicting a big drop in gross margins. He expects Intel to earn about $1.88 per share next year with gross margins at about 58%. A recent Barron's article summarizes the bearish view and it states:

"We believe the 62%-65% gross margins seen over the last three years were the exception to the rule. Over that time, Intel gained share vs. AMD in both PCs and servers and benefited from the last real Windows enterprise upgrade cycle. With these benefits abating, Intel has a number of new challenges in the form commoditization of x86 (by ARM), price competition in both PC and data center markets (also ARM) and an increasing capex burden (with little to no growth). We believe mid 50% (and potentially low 50% over time) gross margins are an increasing reality as opposed to a downside scenario, and investors should brace for lower estimates."

Intel shares look tempting at about $19, especially with a 4.6% yield. However, based on the headwinds facing Intel, including the resignation of CEO Paul Otellini next year, and weak PC sales, it seems that there will be plenty of time to buy the stock at current levels, if not even lower. Plus, what good is collecting a 4.6% yield if the stock might drop another 5 to 10%? A better buying opportunity might come after the first quarter results are posted which should tell investors if the downtrend in PC sales is worsening and if the inventory levels are building. The next financial report will also give a better picture on the gross margin trends which if declining, could mean that earnings estimates are still too high. If that is the case and Intel earns less than expected, the PE ratio might not be as low as some believe.

If we have learned anything in the past couple of months, it is that tech stocks can go lower than where many expect. Just look at everything from a challenged tech company like Hewlett Packard (HPQ) to fast-growing Apple (AAPL); both are at opposite spectrums and yet HP trades for about 4 times earnings and Apple trades for about 10 times. Because of this and the challenges it faces, it would not be surprising for Intel shares to head lower.

Here are some key points for INTC:
Current share price: $19.85
The 52 week range is $19.23 to $29.27
Earnings estimates for 2012: $2.11 per share
Earnings estimates for 2013: $1.95 per share
Annual dividend: 90 cents per share which yields 4.6%

Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial
advisor.

Source: Intel: Margin Pressures Could Take The Stock Lower In Early 2013