Intel (INTC) Stock Earnings Preview: Looking Good into Q2

Intel INTC will report second quarter 2016 earnings results after the bell on Jul 20. The company has a Zacks Rank #2 (Buy) and earnings expected surprise prediction ( Earnings ESP ) of 5.66%, meaning that there's a good chance that it will beat estimates this quarter.

According to Zacks surprise prediction methodology, Buy (Zacks Ranks #1 and #2) and Hold rated stocks when combined with a positive ESP indicate chances of an earnings beat, while sell-rated stocks (Zacks Ranks #4 and #5) are best avoided.

In Intel's case, we also see a good track record, i.e. positive surprises in each of the last four quarters averaging 11.53%. Valuation is also favorable so an earnings beat can lead to share price upside.

INTEL CORP Price and EPS Surprise

INTEL CORP Price and EPS Surprise | INTEL CORP Quote

Non-PC Businesses Are Growing in Importance

Intel recently announced a restructuring of its business operations that appeared to increase focus on its non-PC businesses. This focus is no doubt increasing because Intel truly has unique opportunities in programmable logic with its Altera acquisition. It also has opportunities in memory with its innovative solutions in 3D NAND and 3D Xpoint.

Intel is also developing a security fabric to enable third-party cloud security solutions to communicate with each other. So in April, the company created three new segments called Non-Volatile Memory Solutions Group (NSG), Intel Security Group (ISecG) and Programmable Solutions Group (PSG).

The Internet of Things Group (IoTG) was broken out earlier and since this is a vast market, Intel has said its current focus areas are in the retail, automotive and industrial markets. In January this year, Intel launched a retail platform (reference design) including a retail sensor, a gateway and the Intel Trusted Analytics Platform to provide near-real-time intelligence for retailers and thereby speed up IoT adoption in the vertical.

The Intel RealSense solution is also being used by retailers. This comprises a set of cameras that pick up facial expressions and gestures to communicate with computers and thereby facilitate the matching of clothing and shoe sizes. In auto, it has tied with Mobileye and BMW with the goal of building a vehicle agnostic self-driving system. In industrial, Intel provides building blocks and designs that can help factories develop solutions to manufacture efficiently and take care of worker safety.

Other than these emerging areas, Intel is a leading provider of chips to the data center. This business is not without hassles, given Alphabet's GOOGL decision to test IBM IBM technology, Qualcomm QCOM looking to make inroads with ARM technology and Facebook's FB Open Compute Alliance that is a potential disruptor. But Intel offers performance-per-watt advantages that many companies are still willing to pay a premium for.

Also in this segment is the failed mobile initiative. But wait a second, can this be concerned a total failure when Intel has managed to wrest some share from Qualcomm in Apple's AAPL next iPhone? So not only is it not coming away with empty hands, but its early start on 5G should also improve its prospects in the future. Closing down its efforts in an area where it trails the market therefore can't be viewed too negatively.

Is the PC Business Going Away?

That said, the company still derives over 50% of its revenue from the PC business. So this segment (Client Computing) remains important and we can't wish away the negative effect of a sluggish PC business. What we can do is look at the trend, which appears to be improving. While Gartner and IDC estimated 10-11% declines for the PC market in the March quarter, they are estimating a 4-5% decline in the second with improvement in the second half of the year.

Intel too isn't restricted to desktops and notebooks; it has wins in gaming PCs and other mobile computing devices such as Chromebooks and convertibles. Therefore, all is far from lost. In fact, the company believes that Moore's Law is alive and well and that Intel will continue to execute on it. Management also says that Intel's leadership in computing will help it win in the IoT space.

What Happened Last Quarter

In the first quarter, Intel missed the Zacks Consensus Estimate on revenues but beat on earnings. The all-important Client segment saw ASP increases (due to favorable mix) even as customers burnt through inventory and China market uncertainties continued. Data Center was again impacted by softness at enterprisewith cloud and communications service provider strong.

Intel guided to second-quarter revenue of around $13.5 billion (+/-$500 million), down 1.5% sequentially and up 2.3% from the June quarter of 2015 (lower than the consensus estimate of $14.16 billion). The non-GAAP gross margin is expected to be around 61% (+/-2 percentage points).

R&D and MG&A expenses are expected to come in at around $5.1 billion and restructuring charges $1.2 billion. Non-operating items including impact of equity investments will amount to a net gain of $150 million. Depreciation will be $1.5 billion.

Applying the annual tax rate of 22%, net income comes to $2.56 billion or 19.0% of sales, up sequentially but down from the year-ago quarter.

Bottom Line

Intel should top estimates again this quarter, with results improving across all segments.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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