Shares of Intel (INTC) fell 4% on Monday after the company warned that fourth quarter revenues would fall short of expectations due to hard drive supply shortages. Intel provided the following quote:
Sales of personal computers are expected to be up sequentially in the fourth quarter. However, the worldwide PC supply chain is reducing inventories and microprocessor purchases as a result of hard disk drive supply shortages. The company expects hard disk drive supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of hard disk drives recover during the first half of 2012.
As a result, Intel lowered its guidance numbers for both revenues and gross margins, as shown in the following table.
| Guidance | Original | Revised |
| Revenues | $14.2B to $15.2B | $13.4B to $14.0B |
| Gross Margins (GAAP) | 64.50% | 65.00% |
| Gross Margins (Non-GAAP) | 65.50% | 66.00% |
Unfortunately for Intel, the lowered guidance means that gross margins will fall about three full percentage points from last year's numbers. The following table shows Intel's margins over the past six quarters (GAAP margins). While this quarter still is expected to be up over last quarter, and typically the fourth quarter is its highest gross margin quarter, three percentage points is a large drop.
| Margins | Q2 2010 | Q3 2010 | Q4 2010 | Q1 2011 | Q2 2011 | Q3 2011 |
| Gross | 67.21% | 65.94% | 67.47% | 61.38% | 60.64% | 63.36% |
| Operating | 36.98% | 37.25% | 37.94% | 32.37% | 30.19% | 33.62% |
| Net | 26.82% | 26.62% | 29.57% | 24.60% | 22.67% | 24.37% |
So what does this mean for the quarter? Well, I had just mentioned Intel in my 7 stocks seeing upward earnings revisions article last week. So much for that. Over the past 90 days, analyst expectations had rose from $0.65 to $0.69. Those numbers are likely to come down over the next couple of weeks given today's news. But how much will they come down? Let's see if I can figure it out. An interesting way to estimate profit is to use the net margin to gross margin ratio, which has ranged from 37.38% to 43.83% over the past six quarters (see table below).
| Net/Gross | Q2 2010 | Q3 2010 | Q4 2010 | Q1 2011 | Q2 2011 | Q3 2011 |
| Ratio | 39.90% | 40.36% | 43.83% | 40.08% | 37.38% | 38.46% |
Using those numbers, and based off an estimated 5.1 billion shares (last quarter they were at $5.19 billion, but they are buying back shares), we can use the revised guidance to get our answer.
| Net/Gross | 37% | 38% | 39% | 40% | 41% | 42% | 43% |
| EPS | $0.64 | $0.66 | $0.68 | $0.69 | $0.71 | $0.73 | $0.75 |
If we use last quarter's 38.5% number, we get about $0.67. I think that's a fair estimate given today's warning. That would mean current estimates need to be lowered by 2 cents. Given the huge drop in revenue expectations, I don't think that's too bad.
So given today's 4% drop, is now the time to buy? I say partially. At $24 a share, the stock is yielding 3.5%. A nice dividend. However, as Intel mentioned above, "the company expects hard disk drive supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of hard disk drives recover during the first half of 2012." That makes me believe that Intel could have some lagging effects going into the first quarter of 2012.
Now I expect analysts will bring down their Q1 estimates after this warning, but I would not be surprised if Intel's guidance for that quarter will be extremely conservative. Now, we have seen positive news recently from Western Digital (WDC), as they raised their quarterly guidance and have partially restarted their facilities in Thailand. Like I said above, there still may be some Q1 carryover effects for Intel.
My recommendation is that you can buy half of your position now and the other half after Intel reports its fourth quarter results. The $24 level is a nice number to keep in mind, as the dividend hits 3.5% there. I don't think this hard drive issue will cause major future problems for Intel, so I think any slip in stock price is useful for buying purposes. Remember, a nice dividend and continued buybacks will keep this stock going.
When looking at the industry, Intel remains your best bet, even with today's warning. Advanced Micro Devices (AMD) is struggling mightily right now, and its estimates keep getting cut by analysts. We've seen similar estimate cuts for Texas Instruments (TXN) and even some slight cuts for Nvidia's (NVDA) estimates in 2012. Even after today's news, Intel's estimates are still going to be higher than they were 90 days ago. In fact, 2012 numbers could go up, as people take down 2011 estimates. It's basically an Apple (AAPL) like situation, where a cut in one year's numbers leads to a rise in the next year as sales are pushed forward.
While today's news was definitely not what long investors wanted to see, we knew that there were problems in tech land due to the flooding. Intel surely could be using the floods as a scapegoat for a bad quarter, but you have to think that the floods did have a material impact on the quarter. However, as Western Digital told us recently, things are improving, which means that Intel shareholders can use today's news to get in at lower prices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
