INTC: This Trade on Intel Stock Has Big Potential

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Intel (INTC) faces an uphill battle this Tuesday, as the semiconductor giant faces a veritable wall of worry heading into its third-quarter earnings report. Setting the stage, semiconductor stocks were absolutely hammered at the end of last week, as the flames of panic selling from a market correction were fanned by a revenue warning from Microchip Technology (MCHP).

Intel INTCFor those investors reading between the lines, however, this correction could offer up a solid trading opportunity on Intel stock.

First, let’s take a look at the MCHP-driven correction. The company said that it will miss revenue expectations because of falling demand in China. Fair enough, but CEO Steve Sanghi also told investors that, “While we are reducing our production levels in our wafer fabs and assembly and test facilities, we are continuing to ramp production on our new technologies where we have been capacity constrained. We believe that we will be able to catch up on the capacity constraints during the December quarter and lead times should return to normal.”

So, while there might be some demand issues with China and the industry in general, that last statement makes it look like MCHP could have overcome some of this weakness if it had been better prepared to meet demand for new technologies. One would hope that Intel didn’t (and won’t) make the same mistake.

Which brings us to expectations for INTC’s third-quarter report: Analysts are expecting a profit of 65 cents per share on revenue of $14.44 billion, which is up from 58 cents per share on revenue of $13.48 billion a year ago.

Checking in with EarningsWhisper.com, we find that the Street is whispering that earnings could come in at 67 cents per share, 2 cents better than the consensus. There is reason to believe that INTC could offer up an earnings beat, as, according to Zacks data, Intel has bested the consensus in five of the past eight reporting periods.

What’s more, guidance also could meet with Wall Street approval. First, Lenovo (LNVGY) just announced its Yoga 3 2-in-1 laptop featuring Intel’s Core M processor. Second, rumors continue to grow that the new Macbook Air Retina will use the Intel Core M processor. The new chip is expected to see strong market uptake due to the fact that its low power consumption results in considerably less heat, removing the need for bulky onboard fans.

Turning toward INTC’s sentiment backdrop, we find quite a few bears betting against Intel stock. Within the analyst community, Thomson/First Call data reveals that 27 of the 46 brokerage firms following INTC rate the stock a “hold” or worse. Additionally, the 12-month consensus price target of $35 rests just 9.7% above INTC’s close on Friday.

Options traders are just as skeptical heading into Intel’s quarterly report. Put volume spiked to more than four-times its daily average on Friday, resulting in an October/November put/call ratio of 0.90 for Intel stock. This ratio also ranks in the upper 10% of all those taken in the past year, revealing an unusual degree of pessimism for INTC.

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Overall, October option implieds are pricing in a potential post-earnings move of about 6% for Intel stock. This places the upper bound near $33.91, while the lower bound lies at $30.09. In other words, a positive reaction to tomorrow’s third-quarter report could undo much of Friday’s damage.

Options Trade on Intel Stock

For those traders looking to take a risk on a rebound in Intel stock, a Nov $31/$33 bull call spread has considerable potential. At last check, this spread was offered at 99 cents, or $99 per pair of contracts.

Breakeven lies at $31.99, while a maximum profit of $1.01 is possible if Intel stock closes at or above $33 when November options expire.

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


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/intel-stock-intc-earnings-options/.

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