Intel Corporation (INTC) reported another solid quarter and guidance (for third quarter & fiscal year 2014) as our fiscal year free cash flow per share estimation grows 12% to $2.25 (prior $2.04). Management decides to concentrate on larger capital return structure as cautious, improving balance sheet. Revenue growth is being led by key PCCG and DCG divisions nevertheless shares as completely priced in view of de-leveraging post third quarter on acknowledgment of initial charges and insecurity on expenses controls in future.
Company’s third quarter gross margins outlook of 66% was remarkable, we believe few of this upswings highlights a gain from timing, while the delay in 14nm extended initial costs acknowledgment into both fourth quarter and first quarter. We are optimistic that company is chasing the industry in rising concentrate on return free cash flow to shareholders inside its capital return tactic. Whereas its $20 billion buybacks initiative is likely to translate into a close to net cash zero balance in fourth quarter, we warn investors that company’s balance sheet leverage is sub-optimal at 0.5 times debt/EBITDA compared to most favorable industry level of 2 times. We please to see the optimistic trends in key PCCG and DCG markets; in our view, the shares are priced high while risks climb comprising gross margins condensation as expenditure controls still require to strengthen.
Investors have few positive things to notice from results and commentary. 1) Company authorizes rise of $20 billion for share buybacks 2) The sales in PCCG and DCG remained solid. 3) Gross margins were solid due to increased volumes and less start-up expenditure); 4) Fiscal year 2014 guidance mainly sales and gross margins were hiked; 5) The 15% plus growth was noticed in cloud, networking, high-performance computing and enterprise revenues sequentially; 6) NAND revenues increased by 20% sequentially; 7) The tablets business was on target for 40 million units shipped (15 million units in first half)
We also noticed few negative points including 1) Third quarter is expected to signify a gross margin raise during the next 2 to 3 quarters because of start-up costs; 3) Intel could be seeming as gaining from slip should tablet units fail (lower unit sales help gross margins) and or production delays (14nm drive out start-up helps short-term gross margins); 3) PC ASPs endure to chase lower (decreased by 3% sequentially) on move in direction of cost reducing factors.
We strongly believe that company currently is in transition phase while concentration of rising into new markets is expected to be vital mission and lead EPS leverage. We are reiterating “Sector Perform” rating and increase price target to $34 (from $31 prior).