We expect Intel Corporation INTC to beat expectations when it reports third-quarter 2016 results on Oct 18.
Why a Likely Positive Surprise?
Our proven model shows that Intel is likely to beat earnings because it has the right combination of two key ingredients.
Zacks ESP: Intel’s Earnings ESP stands at +1.39%. This is because the company’s Most Accurate estimate is 73 cents, whereas the Zacks Consensus Estimate is pegged lower at 72 cents. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise.
Zacks Rank: Intel currently has a Zacks Rank #1 (Strong Buy). Note that stocks with a Zacks Rank #1, #2 (Buy) or #3 (Hold) have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of Intel’s Zacks Rank #1 and +1.39% ESP makes us reasonably optimistic of an earnings beat.
What is Driving the Better-than-Expected Earnings?
We note that Intel has posted positive earnings surprise of 11.86% over the trailing four quarters. The consistent performance reflects significant growth from Intel’s data center and cloud businesses.
In mid-September, Intel raised its guidance for third-quarter 2016. The company now expects revenues to be $15.6 billion (+/- $300 million), compared with the earlier range of $14.9 billion (+/-$500 million). The Zacks Consensus Estimate is currently pegged at $15.55 billion.
Intel also increased its gross margin expectations by couple of percentage point (pp) to 63% (+/- 1 pp). Research & development (R&D) and marketing, general & administrative (MG&A) are anticipated to be approximately $5.2 billion, $100 million higher than the previous guidance of approximately $5.1 billion.
We believe that Intel’s growing focus into areas with better growth prospects, such as the artificial intelligence (AI) and Internet of Things (IoT) businesses are key catalysts.
Moreover, the recent acquisitions of artificial intelligence (AI) startups Movidius and Nervana Systems will help Intel in strengthening its footprint in data center, machine learning, deep learning and IoT businesses.
Sluggish Demand for PC’s to Hurt Results?
The mid-September guidance update was based on the assumption that the PC market will improve in the second half of the year. Intel still derives over 50% of its revenue from the PC business (Client Computing), shipments of which declined for the eighth-consecutive quarter in the third quarter, as per data available from market research firms IDC and Gartner.
The preliminary data released by Gartner showed that PC shipments in the quarter slumped 5.7% year over year to 68.9 million units. IDC, on the other hand, stated that PC shipments fell 3.9% year over year to about 68 million units in the third quarter. Note that the actual figures are roughly 3.2% narrower than the research firm’s prior prediction of a 7.1% decline.
However, we note that the downtrend has rather moderated in the third quarter, compared with the previous quarters, which is encouraging for Intel. (Read More: : PC Shipments Fall for 8th Consecutive Quarter: Gartner & IDC).
Moreover, Intel’s recently launched 7th generation CPU – 14nm Kaby Lakechip holds promise. Apart from improved graphics performance, better CPU performance and longer battery life Kaby’s biggest feature is improved support for 4K, which will drive demand going ahead.
Stocks to Consider
Here are some companies you may consider as our proven model shows they too have the right combination of elements to post an earnings beat this quarter:
Asure Software ASUR, with an Earnings ESP of +14.29% and a Zacks Rank #1.
NVIDIA NVDA, with an Earnings ESP of +8.93% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
NetApp NTAP, with an Earnings ESP of +5.26% and a Zacks Rank #1.
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