One on One with Mike McConnell, Senior Research Analyst at Pacific Crest Securities
Tuesday, January 16, 2007
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SUSIE GHARIB: For more analysis now on that Intel earnings report, we're joined by Mike McConnell, senior research analyst at Pacific Crest Securities. Hi Mike.
MIKE McCONNELL, PACIFIC CREST SECURITIES: Hi.
GHARIB: Tell me your analysis of this -- these Intel earnings number. Shouldn't investors interpret this as good news?
McCONNELL: I think if you look at revenue, raw revenue, there's definitely some upside there. The issue, again, as always with Intel, is going to be the gross margins. The gross margins were slightly below where the majority of analysts were expecting and if you look out to the yearly forecast also, the gross margin guidance fell short of expectations. So that's going to be an overhang on the stock tomorrow morning.
GHARIB: Now, the company said that their guidance on revenues at any rate is $9.3 billion for the first quarter. Is that what you expected?
McCONNELL: Yes. Essentially we were expecting seasonal guidance in Q1, which would be exactly that, about a 7 percent sequential decline.
GHARIB: So what is your outlook for Intel looking ahead to the 2007 year and based on also what you heard from management on the conference call this afternoon?
McCONNELL: Well, I think if you look at them from a relative basis to AMD, who's their chief rival, they're in a better position. They have a new product line out in the marketplace; it's getting some good traction. End customers, they seem to be taking share back. So from a relative standpoint, we do prefer them over AMD. Intel was the worst performing component of the Dow index last year and a relative probably safe play through the front half of the year, particularly if you're looking at tech.
We do think that tech in general particularly semiconductors, are going to have a pretty tough quarter in Q4, also some pretty tepid guidance. We're already starting to see some evidence of that. So if you're looking at it from a relative perspective, Intel should fare OK in the front half of the year. Longer term, I think that it's going to be really a function of whether or not the company can maintain market share, which has been very, very high over the past decade at about 80 percent share. It does look like customers are now starting to look at AMD more than they have in the past and that could, over the long term, mean some trouble for Intel, maybe some market share starting to even out a little bit more than what we've seen in the past relative to AMD.
GHARIB: Let's talk about both of the stocks. Intel in after hours trading dropped quite a bit, 2.5 percent. If things are looking so rosy, why was this market reaction after the bell to the down side?
McCONNELL: Expectations. Again, people were expecting better gross margins, so they fell short of those expectations so you're going to see a reaction tomorrow morning. If you look at the stock so far this year, it's been up about 10 percent, so it's actually been relatively outperforming most of the components in the Dow as well as within the semiconductor index.
GHARIB: So is Intel a "buy" or a "sell" in your view?
McCONNELL: Right now we have it rated sector perform so I do expect it on a relative basis to probably track in line with the rest of the index. If you want to look at it relative to AMD, we do prefer it over AMD, but we do tend to like some other semiconductor stocks over the next 12 months better than Intel. So right now...
GHARIB: Let's talk a little bit about AMD. Sorry to jump in but we're running short on time. What's your view on AMD? You said you prefer Intel over AMD, but if you're an AMD investor, should you hold or sell?
McCONNELL: Right now we do believe the fundamentals tend to get worse here than get better. You're looking at a very static product line right now, one that's not going to be seeing any improvement really until the midpoint of the year. So at this point right now, we do think the fundamentals begin to get worse. But, again, a lot of that right now is reflected in the stock price. So we would say that right now, again, looking at AMD, it probably also performs in line with the market. We have that one also rated sector perform. So, again, not really big fans of either company. If you want to play one relative to the other, we do prefer Intel at this juncture over AMD.
GHARIB: Mike do you have any disclosures about Intel or AMD?
McCONNELL: No, none.
GHARIB: OK. Thank you very much for joining us. We appreciate it. We've been speaking with Mike McConnell, senior research analyst at Pacific Crest Securities.
