another big quarter
Intel (INTC) has done it again. The world’s largest semiconductor chipmaker reported third quarter earnings last night that once again beat market expectations. Not only that, the quarter was so impressive that the results actually surpassed the company’s own updated guidance released two months ago. Thanks to a strong back-to-school season, growing China sales, as well as general industry restocking, Intel collected $9.39 billion in revenues, easily outpacing consensus expectations of $9.05 billion. Gross margin (percentage of sales remaining after costs of production are taken out), which has steadily risen for the last 3 quarters was 58 percent, beating the company’s own expectations of 53 percent. These two factors led to larger profits, as net income was reported at $1.86 billion, or 33 cents a share, handily beating estimates of roughly $1.5 billion or 27 cents a share. Intel, whose chips already power more than 80 percent of the world’s PC, continues to expand its global reach – particularly in China. On the company’s conference call, Intel’s CEO Paul Otellini reiterated his thoughts that Asian consumers will lead a rebound in the personal-computer industry – initiating a rebirth of year-over-year growth in that market this year (which is contrary to most analysts’ predictions). The region already accounts for 65 percent of Intel’s sales – 55 percent if you take out Japan. Gartner Inc., a technology research firm, noted that shipments of PCs in China grew by 11 percent in the second quarter over the year-earlier period, far beyond the 2.8 percent growth seen in the first quarter. Gartner has yet to release their third quarter figures, but based on Intel’s results, we expect to learn that the pace has remained torrid. Intel’s outlook for the fourth quarter was also exceptionally upbeat. The company expects revenue for the current period to be $10.1 billion (plus or minus $400 million), outpacing consensus estimates of $9.7 billion. Further, the company sees margins expanding even further, expected at 62 percent (plus or minus 3 percent). While already impressive, the margin number is also notable given that if the company can reach the high-end of its range it would represent Intel’s largest profit margin in the last decade. Needless to say, we are impressed with the company’s quarterly numbers, and think Intel is executing its fundamental business plan exceptionally well. With less reliance on the domestic market (only 20 percent of sales), and continued expansion into developing economies, Intel’s revenue stream is growing at a fast clip. The diversity of revenues also helps reduce overall business volatility. This utterly dominant company is trading at less than 15 times 2010 earnings, and with a PEG of 1.4, the shares continue to represent compelling value.

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