Update Intel (INTC)

04/14/2010 9:39 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Blow out quarter. Stunning increase in guidance. A totally justified 4.3% gain in the after-hours market on the day it announced earnings.

Now we’ll see if Intel (INTC) can juice the rest of the technology sector. (Look today to see how Microsoft (MSFT) reacts, for example.)

After the market closed on April 13 Intel announced earnings of 43 cents a share. That was 5 cents above Wall Street projections. Earnings for the first quarter of 2009 came to 11 cents a share. Revenue increased by 44% to $10.3 billion. Analysts had projected $9.84 billion. Gross margin climbed to 63.4%. That was above the company’s January forecast of 59% to 63%.

But the good news didn’t stop with the current quarter.

Second quarter revenue, the company said, will be $9.8 billion to $10.6 billion. That’s way ahead of a Wall Street estimate of $9.7 billion.

Gross margins, Intel told analysts, will climb to a range of 62% to 66% for the second quarter. Before the earnings report, analysts had been projecting gross margins of 60.4%. For all of 2010, Intel said, gross margins will come in between 62% and 66%. The company had been projecting gross margins of 58% to 64%.

The increase in gross margins is the key piece of news in this report. To get margins up to that level the product mix at Intel has had to shift toward a higher proportion of sales from more profitable server chips. Industry watchers have recently forecast a two-year cycle of big increases in server purchases as corporate customers upgrade their equipment. Intel seems to be signaling that it’s going to ride that trend to higher margins for more than just the next quarter.

As of April 14 I’m raising the target price on Intel to $30.40 by December 2010 from my earlier target of $27.20 by December. That’s roughly 16 times my conservative estimate of $1.90 a share in earnings for 2010.

Full disclosure: I own shares of Microsoft in my personal portfolio.

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