Intel: When a Warning is Good (INTC, SMH)

Intel Corporation (NASDAQ: INTC) warned, but here is the issue: THIS IS A ‘GOOD WARNING’ if you consider the news versus the current situation.  First and foremost, it does not take a rocket scientist to figure out that PC metrics and component metrics have been lower across the board as you have seen reports of rising inventories and slowing consumer sales.  Where the warning gets interesting is that Intel is differentiating between these two forces of inventories and demand:

• “Revenue is being affected by weaker than expected demand for consumer PCs in mature markets. Inventories across the supply chain appear to be in-line with the company’s revised expectations.”

The third-quarter revenue will be below the company’s previous outlook, but the new outlook is as follows…

$11.0 billion in revenues, plus or minus $200 million.  So call its $10.8 to $11.2 billion.  The previous expectation was $11.2 to $12 billion.  This still represents sequential and annual growth as the company’s revenues were $10.765 billion in Q2 and $9.389 billion in the Q3-2009 period.

Gross margin in the third quarter is now being put at 66%, plus/minus 1 point. The previous expectation was 67%, plus or minus a couple points.  Intel noted that the impact of lower volume is being partially offset by slightly higher average selling prices stemming from solid enterprise demand.  Our own take was that margins were already peaking at the end of the first quarter.

Equity Investments, Interest and Other is expected to be $175 million, consistent with the company’s revised expectation reported in July.

“All other expectations for the third quarter remain unchanged. The outlook for the third quarter does not include the effect of any acquisitions, divestitures or similar transactions that may be completed after Aug. 26.”

Intel lastly gave its earnings date as being October 12, where it will update fourth quarter and full year estimates.

Analysts have been lazy in the last month without lowering any targets.  Despite a challenge of 52-week lows, there have been few downgrades and few earnings and revenue estimates trimmed.  Thomson Reuters was already under the mid-point of Intel’s prior guidance at $11.52 billion versus $11.6 billion at the prior mid-point.  The lowest revenue estimate was $11.22 billion, so this lowering is still slightly under the worst expectation even if you are considering a whisper number.

So why is a warning “good” in this instance.  For starters, there was just about no chance that Intel could not lower its revenues.  While it noted a weak consumer, it is still talking about enterprise demand holding up.  The concern was that both would have been seeing weaker pricing and weaker demand.  Another thought is that Intel is probably setting the bar lower than what the real situation is, an under-promise and over-deliver strategy.

Intels’ prior 52-week low was $18.12 and it was $18.15 before that.  Shares are currently up 0.1% at $18.20 on almost 60 million shares.  The intraday low came around some off-market prints of $16.55 around the first trading halt.  If NASDAQ allows that to stand then investors are going to lose even more faith in the system.

We are also watching the Semiconductor HOLDRS (NYSE: SMH) as Intel is actually 21.8% of that ETF.  This ETF is trading UP 0.7% at $25.12 on more than 13 million shares.  Sometimes coming clean with bad news that is not as bad as many feared is a way to shake out the short sellers.

JON C. OGG