Intel Corp. (Nasdaq: INTC) Is Poised to Top Earnings Estimates Over the Next Two Quarters

By: Money_Morning

Horacio Marquez writes: Intel Corp. (Nasdaq: INTC) is a cyclical company. That is, its stock does extremely well when the economy is ready to accelerate, and does poorly when the economy decelerates. So it's no wonder that last year the stock fell more than 50% from the record-high of $27.78 a share it reached December 2007. However, the company has rallied more than 50% from its Feb. 23 low of $12.08 a share. It closed Friday at $19.64.

So, what's next?

For starters, Intel beat second-quarter earnings estimates by 10 cents a share, as its revenue climbed 12% year-over-year to $8 billion. Beating earnings estimates is important, but beating on the top line and showing sales growth is even more important in a recession. The reason: It shows that you can do well in spite of a weak economy.

Like most chip stocks, Intel is an economic leading indicator of sorts - a fact that bodes well for the U.S. recovery. Intel said demand actually strengthened as the quarter moved along. This is the precursor of a much more vigorous third and fourth quarter, which traditionally is when tech companies perform the best.

Adding more fuel to the fire, Intel increased it sales forecast to $9 billion from $8.5 billion and boosted the outlook for its gross margins to the upper end of the 53%-55% range.

One of the big reasons for Intel's recent progress has been the launch of Microsoft Corp.'s (Nasdaq: MSFT) Windows 7, which has been well received by many analysts. Upgrading to Windows 7 from Vista in an existing machine is quite a task. It requires erasing the hard disk and installing the new operating system and all the other software from scratch.

This is different from the traditional incremental upgrades, in which many of the older files remained in place, while the upgrade took care of overwriting and deleting the unnecessary old system files and installing the new ones. For small companies that have outdated technology, this process is too tedious and it is much more expedient to buy new machines with the new operating system preinstalled.

And there are a lot of old machines with outdated software out there in the business world. It is not uncommon to see five-year old machines that are not capable of running new resource-intensive applications. To verify my analysis, I called friends in Fortune 500 companies that manage PCs for their own corporations or for top technology vendors.

The feedback was unanimous in that Vista's complexity - despite its significant features that were attractive to some specific users - made the operating system an overall disappointment to companies. The operating system lacked the desired stability and increased maintenance costs. So the consensus was that corporations would be quick to abandon Vista for Windows 7.

And given the complexity in upgrading existing Vista systems, and the old age of the equipment, it makes sense that many companies would seek to replace entire machines altogether. So we have the old the "Wintel" symbiosis kicking into high gear.

Also, corporations have cut personnel deeply and need to increase the productivity of their now-overburdened workforce. Some 70% of employees are not satisfied with their current position, given the additional stress and lack of additional pay. Therefore, upgrading their technology to make their jobs easier is a high priority.

This won't be too difficult, because companies' profits have actually grown 23% in the last two quarters. With Corporate America now having recapitalized, a new technological wave makes all the sense in the world.

Thus, the argument that the demand pickup is just filling the chain and inventory rebuilding, and that we will be disappointed come January does not seem to hold. In either case, you will see an outperformance of earnings come the next report, so we should use any downdraft to get into Intel stock.

Also, Intel has regained its technological leadership against Advanced Micro Devices Inc. (NYSE: AMD), despite that fact that AMD is doing well in areas where integrated graphics are important, finally leveraging its acquisition of ATI.

With all cylinders firing, Intel is poised to deliver an upside earnings surprise in the third quarter and blow through estimates in the fourth quarter. Valuation is cheap compared to the Standard & Poor's 500 Index, considering the rate of growth that Intel is experiencing and expected to deliver both in the short term and well into next year as Windows 7 deployment motivates sales.

The stock is clearly above the 200-day moving average and seems a bit overbought short term. So do not chase it. But start buying right away, looking to average down over the next 45 days if possible, averaging up until you reach your full position if it keeps running.

Recommendation: Buy Intel Corp. (Nasdaq: INTC) by averaging into the stock over the next 45 days, thus reducing market risk (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in Intel Corp.

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