Here’s some advice to the analysts covering Intel (INTC), “Step away from your earnings models and start listening to the company.” I’m as analytical as they come, but I don’t need to open a spreadsheet or try to calculate microchip sales to tell that Intel will crush earnings for Q2. After a blowout Q1 where analysts estimated $0.46 EPS and were humbled by $0.10 EPS beat, they have set the bar unbelievably low again at $0.51 EPS. Let’s take a look at what the analysts are missing.
The Q1 Call and Investor Day
CEO Paul Otellini was talking a big game at both of events. In the Q1 conference call he said the enterprise and data market has seen “phenomenal growth across all of its various product groups”. And that “All these devices connect to these servers or these network machines one way or another. And this is where we're benefiting quite well.” He followed up these bullish remarks on the enterprise market at the investor day a few weeks later. Otellini asked the audience, “Pop quiz: Which silicon vendor makes the most money on smart phones and tablets today? Intel. Anyone surprised?” “We’re making far more margin than any silicon vendor is selling into those devices. The money is in the infrastructure.”
On the consumer side, Intel predicted low double digit growth in the PC market well into 2012. Low double digit growth is among the most bullish of estimates among chip makers and research firms. Intel even seemed to take a shot at some of the third party research firms (in particular IDC) for their lower PC growth predictions, hinting that they were underestimating the emerging market demand.
Processor Price List
Intel publishes a processor price list at least once a month on their investor relations page. This may be the most important piece of information Intel gives to the public about the trajectory of their current quarterly sales (http://www.intc.com/priceList.cfm). During Q2 Intel did not lower prices on any of their over 200 chips. This shows unbelievable demand for their product. It is especially impressive when you consider that many of these chips are older and were competing against Intel’s newest generation of chips (Sandy Bridge), which the company started rolling out earlier this year. Despite the continued strong demand shown by the lack of price decreases in Intel’s chips, most analysts have refused to raise their estimates.
The IDC Smack Down
On June 6, 2011 research firm IDC lowered their PC growth estimates for 2011 to 4.2%, down from 7.1%. The firm attributed the revised outlook to “a combination of declining first quarter shipments, an increasingly conservative economic outlook, relative saturation among developed market consumers, and competing products.” Less than three hours later Intel responded to the revised forecast by pinging Barron’s tech writer Tiernan Ray saying “Intel reaffirms our business outlook for the second quarter. Our results will speak for themselves on PC shipments for Q2 and 2011”
How is that for bullish? This is an extremely rare and unprovoked rebuttal by Intel. With over two-thirds of the quarter completed, there is no way any spokesperson for Intel would have made that statement unless upper management directed them to do so.
Intel has been relatively conservative on their guidance the past year, helping them beat analyst expectations each of the past four quarters by an average of about 15%. They guided flat margins and revenue from Q1 to Q2, which is probably conservative as well. It appears that analysts are betting on lower margins and have figured in a slightly higher tax rate this quarter to get to $0.51 EPS vs. the $0.56 EPS last quarter. However, based off the rhetoric from Intel in the last three months, it seems extremely unlikely they turn in earnings that are anything but a blowout. Add in their aggressive stock repurchase plan, and this sets up to be another quarter that will leave the analysts looking foolish.
Disclosure: I am long INTC.