Don’t Bet on Intel Ahead of Earnings

by Joseph Hargett | April 16, 2013 10:52 am

When semiconductor bellwether Intel (NASDAQ:INTC[1]) steps into the earnings limelight this afternoon, it will have to work hard to convince investors that it is back on the right track. Following years of raking in cash from the PC market, Intel was blindsided by the rapid shift toward mobile computing … so much so that the company announced a $13 billion capital expenditure plan[2] last quarter in an effort to play catchup.

Intel desperately needs to make inroads into the mobile market, as PC sales continue to founder. In fact, depending on which report you read, global PC shipments fell anywhere from 11% to 14% during the first quarter of 2013. The company has announced that it is developing processors specifically designed for increased tablet computing performance, but real-world applications and sales remain to be seen.

Turing to tonight’s quarterly report, the consensus is looking for a first-quarter profit of 40 cents per share on revenue of $12.6 billion — down from earnings of 53 cents per share and revenue of $12.9 billion in the same period last year. Falling revenue clearly is a concern, and given recent news in the PC market, there is little hope of a turnaround for this quarter.

Other factors could come into play tonight, too. Specifically, Intel is expected to provide second-quarter revenue guidance of $12.9 billion. If the company wants to reassure investors, this would be the figure that needs to top expectations.

Elsewhere, CEO Paul Otellini announced in 2012 that he will be stepping down this year. Intel has yet to announce a successor, one whose role will be key in setting the course for the company’s future.

The beat on the Street is decidedly non-committal when it comes to Intel’s prospects. EarningsWhisper.com reports a first-quarter whisper number of 44 cents per share for Intel — 2 cents better than the consensus — but that is about the extent of Wall Street’s bullish sentiment.

For instance, data from Thomson/First Call reveals that only 16 of the 48 analysts following INTC rate the shares a “buy” or better, compared to 25 “holds” and seven “sell” ratings. Additionally, the average 12-month price target for INTC rests at $23 per share, representing a meager premium of about 7% compared to yesterday’s close at $21.38.

Short sellers also have gotten in on the act, with INTC short interest rising 21% to nearly 239 million shares during the past two months. The short side is far from overcrowded, however, as only about 4.8% of INTC’s float is currently sold short. In other words, despite the rising negativity, there is little fuel for any potential short-covering rally should Intel offer up better-than-expected numbers after the close.

Options activity also shows a rather directionless bias heading into Intel’s quarterly report. There are about 510,000 calls open in the April/May options series, compared to put open interest of about 451,000 contracts. The result is a middle-of-the-road put/call open interest ratio of 0.88 — meaning calls and puts are nearly in parity in the April/May series.

Taking a closer look at this activity, call traders are heavily focused on INTC’s weekly April 22 strike, with some 151,000 contracts open here. The next most active strike is the April 23 call, where roughly 63,000 contracts reside. On the put side, the April 21 strike is most popular, sporting open interest of 115,000 contracts. Following at a distant second is the April 20 put strike, with about 55,000 contracts in residence.

INTC 300x247 Don't Bet on Intel Ahead of Earnings
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Delving a bit deeper, April option implieds are pricing in a post-earnings move of about 4%, meaning that the April 23 call and April 21 put are right on the cusp. A 4% move also would put INTC in contention with either its 50-week or 200-week moving average, as you can see from the chart.

Options traders looking for a pre-earnings play on INTC will want to exercise a bit of caution. The stock took a beating yesterday, alongside the broader market, so today’s post-selloff bounce was to be expected. Still, with the PC market struggling and Intel not offering a clear path forward in mobile, I’m inclined to bet against the stock ahead of tonight’s report.

Keeping volatility and the potential for technical support/resistance in mind, a bear put spread might be the best strategy.

Specifically, the May 20.50/21.50 put spread was last offered at 33 cents, or $33 per pair of contracts. Breakeven for this trade lies at $21.17, a loss of about 1.5% from INTC’s current position, while a maximum profit of 67 cents, or $67 per pair of contracts, is possible if the stock closes at or below $20.50 when May options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Endnotes:
  1. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  2. announced a $13 billion capital expenditure plan: http://money.msn.com/top-stocks/post.aspx?post=d6048c9b-0f57-4d53-b6f3-31ef5ddaf8bf

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