Intel Could Come In at the High End

 | Jan 16, 2014 | 7:00 AM EST
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Intel (INTC) is due to report fourth-quarter earnings after the close. In advance of the announcement, J.P. Morgan upgraded the stock on the thesis that the personal-computer business has bottomed out -- and I think it's a good call, even though the stock has already gained 18% since it hit its lows in October. There seems to be evidence that Intel will report toward the high end of the company's previous guidance.

Data-center demand is picking up. Microsoft (MSFT) will no longer support Windows XP after April, so many large customers are upgrading their servers. That demand started in the third quarter and looks to continue into the new year.

That said, according to Gartner Group, PC sales were abysmal during the holidays. The numbers fell 7% worldwide in the fourth quarter, making this the seventh quarter of declines in a row. So let's not get too carried away: The PC business still stinks. Nonetheless, analysts thought sales would fall 10%, so the December quarter was less bad than expected.

For Intel, top-line growth picked up in the third quarter, and the company posted a 9% positive surprise. Revenue was up 5.2% sequentially and 0.2% year over year. Investors are now betting that momentum carried into the fourth quarter.

I expect Intel to report a profit of $0.52 per share on $13.72 billion in revenue. Fourth-quarter sales are estimated to climb 1.6% over the third quarter and 1.7% vs. last year. Meanwhile, Intel's gross margin is closely watched -- and margins have rebounded since the company lowered its manufacturing costs by shipping chips on its brand-new 14-nanometer process. That said, gross margin is still expected to come in at just 61%. That's quite a come-down from a company that had regularly reported gross margins in the 65% range.

Even so, if you believe Intel's new Atom processor can gain market share in tablets and smartphones, it's reasonable to expect potential earnings of more than $3 per share by 2016. Assuming a price-to-earnings ratio of 12x, that would mean a share climb to $36. I think that's a stretch.

Still, a fourth-quarter report at the high end of the range should keep the party going a little while longer -- and provide a boost for the stock.

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