Intel (INTC) stock tumbled with the rest of the Dow Jones Industrial Average Wednesday, despite posting a strong beat-and-raise earnings report the night before.
If this is how earnings season is going to shape up, maybe we should just forget the whole thing. The market seems to be focusing on anything but quarterly corporate reports these days.
Which is too bad in the case of INTC. True, the longer term outlook for PC sales — Intel stock’s bread and butter — might not be too hot, but in the near term, activity is picking up briskly.
Intel stock popped in after-hours trading Tuesday after it lifted its forecast for current-quarter revenue. Demand for PCs has been recovering all year as businesses replace older machines or migrate away from Windows XP, which Microsoft (MSFT) no longer supports.
Consumer sales are also benefiting from the replacement and upgrade cycle. That should mean good things for INTC in the busy end-of-the year shopping season. As INTC said in a press release:
“The worldwide PC supply chain appears to be healthy, with inventory levels appropriate in anticipation of the fourth quarter retail cycles.”
Intel processors are in 80% of personal computers and 98% of servers. Strength in these areas reflects a increase in corporate spending even as sales to China continue to wane. As a result, Intel’s quarterly earnings rose 12% to $3.32 billion, or 66 cents per share, from $2.95 billion, or 58 cents, a year earlier. Analysts were looking for INTC earnings to come in at 65 cents per share.
Sales increased 7.9% to a record $14.6 billion, which also beat Wall Street estimates. Throw in margin expansion and the better-than-expected revenue forecast, and a report like this should be lifting Intel stock.
Intel Stock Downgraded — and Caught in Downdraft
True, Morgan Stanley analysts downgraded Intel stock to “underweight” (essentially a sell), citing concerns about a buildup in inventory, but that’s not enough to cause a 4% drop in a stock with a market cap of $153 billion.
Rather, Intel stock is being pulled down by the forces weighing on all equity markets. (That’s what happens when a stock has a beta of 1, which means it usually moves right in line S&P 500.) More importantly, Intel may be in for even more of a drubbing if only because it has been such a winner this year.
Before Wednesday’s selloff, Intel stock was up 24% for the year-to-date, outperforming the broader market by 20 percentage points. That’s a big turnaround for this stock, which has mostly lagged the S&P 500 since the bear-market bottom of 2009.
With an improving backdrop for PC sales, Intel stock may look like a candidate for buy-on-the-dip. After all, sales are projected to set yet another new record in the fourth quarter. But INTC is still too expensive relative to its own growth forecast, as well as its own history.
Intel sports a price-to-earnings (P/E) multiple of 13.3 and a growth forecast of less than 9. That’s not terrible, but it looks fully valued at the very least. Furthermore, Intel stock trades at steep premiums to its trailing and forward five-year average P/Es.
If the current selloff deepens enough to bring Intel stock at least in line with its own historic price-to-earnings ratio, it very well might be a buy. Current valuation — even after Wednesday’s shellacking — only sets INTC up for more years of market-lagging performance.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
