Despite Earnings Surprise, Intel Still a Bit Too Risky

10/20/2011 3:31 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It was as much of a surprise as Apple’s (AAPL) earnings miss.

On October 18, after the New York market closed, Intel (INTC) announced third-quarter earnings of 69 cents a share, 6 cents a share above the Wall Street consensus.

And the biggest contributor to Intel’s surprise was its PC chip group, which contributed $4 billion in pre-tax profit. The company’s unit focused on servers and cloud computing added $1.2 billion in pre-tax profits. And Intel’s chip group that produces low-power chips for tablets, embedded processors, and smartphones turned in a $140 million loss.

Revenue climbed 28% from the third quarter of 2010, to $14.2 billion. Analysts had been looking for revenue of $14.23 billion.

The strong performance in the data center and cloud-computing segment was expected. Growth rates in both markets are strong, and Intel has aggressively pushed new generations of server chips into the market. Its new server chip, the Xeon E5, is due to go on sale in early 2012.

But Wall Street analysts had projected much less revenue and much lower earnings growth for the PC chip unit, as PC growth slowed, under the dual pressure of a slowing economy that has kept consumer sales down and the shift from PCs and laptops to tablets and smartphones.

That shift wasn’t in evidence this quarter. Sales of chips for notebooks grew in double digits. Intel has been saying that it wasn’t seeing nearly the shift to tablets outside the United States as in the US market, and sales this quarter, Intel reported, were especially strong in emerging markets.

Considering all the good news this quarter, Intel sounded a very cautious note for the fourth quarter. The company did increase its revenue guidance for the fourth quarter, to $14.7 billion from an earlier forecast of $14.2 billion. But that’s just a 3.5% addition, and Intel stressed that it was concerned about how a slowdown in European growth might lower PC sales in that market.

At the close on October 19, Intel shares were just 26 cents away from their 52-week high. The stock is trading at just 10.1 times trailing 12-month earnings, and pays a dividend of 3%.

That price-to-earnings ratio is cheap, but with developed economies showing strong signs of slowing, I think the risk in these shares outweighs the reward at this share price.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Intel as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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