Intel Earnings Preview: Bleeding From Price War?

| About: Intel Corporation (INTC)

When AMD issued a profit warning last week due to pricing pressure, Intel watchers could take it two ways:

– Intel is kicking the snot out of AMD;
– Or there's a price war that'll hurt both parties.

We'll get more color on whether Intel had any price war wounds when it reports its fourth quarter results later today. The company is expected to report fourth quarter earnings of 25 cents a share on revenue of $9.4 billion. Analysts also appear to expect Intel to beat those figures.

The wild-card: AMD was clearly hurt by Intel's pricing, but Intel may have had some self-inflicted wounds. The jury seems to be decidedly mixed on the point. And even those analysts that expect Intel to show strong gains in the fourth quarter are doubtful the fun will last into 2007.

Bank of America analyst Sumit Dhanda expects Intel to top consensus estimates due to an "improving mix of products (driving higher ASPs), 2) better fixed cost leverage with higher volumes,  and  3) improving unit costs."

Morgan Stanley analyst Mark Edelstone agrees for the most part,  but is wary of 2007. "We continue to believe that Intel will face margin pressure as they undertake an aggressive pricing campaign to regain market share this year," says Edelstone.

"As the fourth quarter will likely show when the actual data is provided, Intel really hit AMD where it hurts in the fourth quarter by causing their server ASPs to decline sharply.  Now that AMD has been wounded and their business model exposed, we expect Intel to continue to be aggressive during the next couple of quarters.  Until AMD ramps its Rev G processor into volume in the second half of this year, we believe that Intel's overall product portfolio will be strong enough to make AMD vulnerable.  On January 21, we expect Intel to lower prices for its Pentium 4 (single core) and Pentium D 900 series (initial dual core design known as Presler)  MPUs."

Bottom line: While Intel's quarter should look good relative to AMD, it's unclear how the price war will play out over time.

As far as Intel's view of the industry, Edelstone notes that notebook PC demand has been solid, but desktop sales have lagged. It's possible that notebook sales will stall in the first quarter as Vista is rolled out.

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