I am one of Seeking Alpha's biggest Intel (INTC) bulls, but I would be remiss if I weren't to scream really loudly that the upcoming Q4 earnings report and subsequent 2013 guidance is an absolutely gigantic deal. The company will not only report Q4 results (which I actually think will be quite good -- more on that later), but it will really set the expectations for the entirety of 2013. If the forecast is good, then that really will "raise the bar" on the expectations on the full year and bring sentiment back into more "positive" territory. If the full year guidance is underwhelming, then shareholders are likely to be in a lot of pain for the remainder of the year.
Q4 and FY2012 Expectations
Intel gave guidance of $13.1B - $14.1B in sales for the current quarter, with the midpoint laying squarely at the $13.6B mark. This is slightly down Y/Y from the $13.89 mark. Analysts are actually slightly more optimistic than Intel's midpoint mark, with the consensus sitting at $13.77B.
It's not really likely that anybody expects Intel to miss; the company generally warns if it's not going to come in within the range, and history has shown that they like to keep the midpoint of their guides conservative. It is fully within reason to expect the quarter goes better-than-expected.
For full year 2012, well, the analysts are expecting $53.44B in sales, a tiny decline from the $54B mark it hit for 2011. On the EPS side, analysts are modeling $2.11, a decline from $2.39 last year. Net income will have been affected by both increased R&D spending over the prior year as well as the big gross margin hit for Q4 due to the excess capacity charges.
Not the "disaster" that people seem to think, but in all likelihood, this will be a year of moderate decline for the company unless the company actually hits the top end of the guidance for Q4 -- in which case 2012 becomes a flat year for the company.
2013 -- The Big Unknown
The pessimism around the stock is primarily due to uncertainty. Here's what people just plain don't know the answers to yet:
- Are devices such as tablets and smartphones cannibalizing Intel's core markets?
- Will Intel be able to generate top and bottom line growth going forward by aggressively expanding its "Atom" lineup into adjacent markets?
- Will ARM (ARMH)-enabled competitors put a damper on Intel's growth prospects in the data-center? Can Intel get its "Atom" at lower power levels and higher performance levels than the ARM camp? (server buyers don't care about brand -- they just want the best)
- Will "Haswell" enable a sufficiently compelling "Ultrabook" platform to not only re-energize the PC platform, but to actually enable some reverse-cannibalization (to lead to growth)?
- Can Intel maintain its transistor leadership while at the same time keeping costs in check?
- And most importantly: will 2013 be another negative-growth year for Intel?
Investors do not know the answers to these questions. While bulls such as myself are hopeful that Intel will do the right things and defend its core markets while taking share in new ones, the bears rightly point out that Intel really should not have let itself get to this spot in the first place.
What Do The Analysts Think?
Going into 2013, there is little visibility for shareholders. However, we do know to expect the following:
- Intel's gross margin will dip in Q1 2013 fairly substantially due to startup costs related to 14nm in addition to some excess capacity charges
- Intel's gross margin will incur additional startup costs in Q2 2013 as the 14nm build-out continues, but the excess capacity charges will likely be gone
- Capex will be highly dependent on projected 2013 and 2014 sales (i.e. unknown)
That leads us to analyst consensus of $54.43B in sales but an EPS of $1.94. This likely explains the depressed valuation at these levels; investors are expecting that P/E multiple will expand by virtue of lower EPS.
Growth Drivers For 2013
It is helpful to identify the potential growth drivers during 2013 as we prepare for the forecast:
- Cloud is a very high growth segment for the data-center group. There is every indication that this will continue to be a nice growth driver for Intel (especially as the firm refreshes its Atom lineup with "Avoton" on 22nm)
- The data-center's other segments: enterprise, networking, and storage could also see some very nice growth during 2013
- PC demand could pickup as Ultrabooks with Windows 8 make for a fundamentally more compelling platform
- Intel's mobile efforts start to become accreative to EPS and sales in a nontrivial way
- Intel could continue to drain share from AMD at the high end (server, enterprise, desktop, notebook)
Headwinds For 2013
There are also some real headwinds that investors need to keep an eye out for:
- AMD will be releasing its "Kabini" low power APUs which have the potential to take back market share at the low end of the spectrum (and hurt Atom/Celeron/Pentium sales)
- The macroeconomic environment could worsen (especially in light of the fiscal cliff), which could cut spending in the USA significantly (consumer and enterprise)
- PC sales continue to weaken and developing nation PC growth does not resume
To assess the upside/downside, it all comes down to EPS estimates and top-line growth. If analysts and investors sense that there will be nice top line growth and successful expansion into adjacent markets, then a multiple of 11-13x EPS wouldn't be unreasonable. Should the markets believe Intel is stagnant/too-little-too-late/etc. then multiples more along the lines of 9-10 are in order.
The analyst estimate range for FY2013 EPS is $1.60 - $2.35 with an average of $1.94. So worst case? No growth ahead, the bottom of the EPS estimate range is expected, and so Intel gets assigned a P/E of 9 against EPS of $1.6, giving us a price target of $14.40 in the absolute most bearish case at this point. Now, suppose the stars align, everything looks great, and we hear a lot of great stuff on the call. Then we get a target P/E of 13 against EPS of $2.35 giving us a $30 upside target.
Realistically, $1.60 EPS isn't going to happen (this is just too bearish), so let's assume EPS falls more at $2.00 (a slight decline from the current year), but earnings multiple varies on sentiment. At a 9 P/E, we have downside to $18, at 10 P/E we stay flat, and so on through a 13 P/E giving us upside to $23. So we have $2.10/share worth of downside risk in exchange for $2.90/share worth of upside based on these estimates. This isn't all that attractive...until we get to the next part.
The wildcard really is the massive buyback that was announced while the stock was at the $19 level. This signaled to a lot of investors that Intel believed the stock was massively underpriced and that in this case it was time to retire some shares. I realistically believe that as long as the 2013 estimates aren't dreadful, $19 support will hold and there is room to run even beyond $23 level in the near-term on any upside surprise/hype from new product launches/earnings beats throughout the year.
If you're an Intel shareholder, pay very close attention to this quarter's earnings call. There are a lot of questions that need answering, and you should not put yourself at a disadvantage by not knowing the answers that other investors will. As always, I plan to release coverage of the report, but I highly, highly recommend listening to the call.
Disclosure: I am long INTC.
Additional disclosure: I am short ARMH