Our quantitative earnings model predicts that Intel Corporation (NASDAQ:INTC) will beat the Wall St. consensus EPS and revenue estimates when they release next Wednesday after market close.
We’ll start by providing our projections, proceed to an explanation of the rationale behind the projections, and finish with some additional analysis and supplementary charts. Our track record of past quarterly earnings predictions made by the model can be found here.
On average, sell-side analysts on Wall Street expect Intel to report $0.52 in EPS for this quarter. Our model projects a 65-75% probability that Intel will beat these projections. It expects a large beat on estimates, ranging from 5-10% higher than consensus (EPS between $0.55 to $0.57).
On average, sell-side analysts on Wall Street expect Intel to report revenues of $13.14 billion for this quarter. Our model projects a 55-65% probability that Intel will beat these projections. It expects a small beat on estimates, ranging from 0-5% higher than consensus (revenue between $13.15B to $13.80B).
Analyst estimates are consistently too conservative as companies beat earnings estimates over 60% of the time. Analysts may do this to stimulate trading (e.g.,Hayes 1998), to obtain access to management (e.g., Lim 2001) or to confirm a prior sentiment on a stock (e.g. Hwang 1996). In any case, analysts are incentivized to “play nice” with the companies that they cover, and this manifests itself in earnings estimates that are consistently lower than they should be.
This pattern of earnings estimate manipulation can be taken to the extreme in certain companies. Thus, the most important factor to consider when predicting whether a company will beat earnings estimates ahead of time is its past track record of estimate beats. While Intel may not be an extreme example of earnings estimate manipulation, it does have quite a consistent track record of outperforming analyst estimates. Below is INTC’s earnings history:
Last quarter, INTC beat the consensus EPS estimate of $0.40 by 1¢ for a 2.5% surprise. This was the 5th consecutive earnings surprise for Intel, and the 7th in the last 10 quarters. The reported EPS of $0.41 represented a 7.89% Y0Y earnings growth over FQ1 2014’s reported EPS of $0.38. The Wall St. consensus EPS estimate of $0.52 is 3¢ lower than the FQ2 2014 reported EPS of $0.55, representing an expected YoY earnings growth rate of -5.45%. As seen on Table 1.1 in the appendix, if INTC were to experience negative YoY earnings growth it would be the first time since FQ1 2014.
It’s clear from the size of the EPS surprises (big beats and small misses), that Intel appears to be a company that analysts have a tendency to “play nice” with. This is possibly due its immense size, which increases the importance of the relationship for analysts. Although the correlation is not as strong on the revenue side, the same story holds, with Intel’s revenue beats proving greater than their misses. Below is Intel’s revenue history:
While last quarter’s reported revenue of $12.78 billion marked a $44 million (0.35%) miss on the Wall St. consensus of $12.82 billion, it was only the 5th time in the last 10 quarters that Intel had missed revenue projections. It also represented positive YoY revenue growth to the tune of 0.13%. Hopefully Intel can repeat the 2% revenue beat that they recorded 12 months ago, and not the 0.67% miss that they recorded 24 months ago. This quarter’s consensus revenue estimate of $13.14B would represent -5% YoY revenue growth compared to FQ2 2014’s reported revenue of $13.83B. Considering that Intel hasn’t recorded negative YoY revenue growth since FQ2 2013, we feel that the -5% revenue growth cushion that analysts are expecting is overly bearish, and that Intel will beat the Wall St. consensus revenue estimate.
Another factor that plays a big role in our predictive model is the recent performance of Intel’s stock price. We’ve found through extensive historical back testing that the market tends to anticipate strong earnings ahead of time, and thus stocks are bid up in price ahead of earnings. This proves to be a warning sign for Intel’s upcoming earnings, considering how poorly Intel has performed, especially after AMD issued negative guidance today.
The chart below shows Intel’s price performance over the last six months, and compares it to the average six-month performance of stocks in the semiconductors industry group, the information technology sector, and the overall market. It also includes the top five semiconductor stocks ranked by six-month price performance for comparison:
Over the last six months, Intel’s stock price has dropped dramatically to the tune of 15.17%. This is compared to the industry group average of +4.78%, the sector average of +4.67%, and the overall market average of +3.82%. Intel has been a laggard recently, which is not a good sign as it heads into earnings. At the very least, the market is not excited for Intel’s earnings release. This does potentially mean that if Intel ends up beating expectations by a wide margin, then the market could react favorably and reward Intel shareholders.
While we’re confident that Intel will beat analyst estimates when they release, that does not necessarily mean that we advise buying the stock before the release. On average, stocks that beat analyst estimates will rise in stock price by around 1-2%. However, there is a huge amount of variation around this average, and many stocks will actually decrease in price even after strong earnings releases.
Valuation is the best factor available when determining post-earnings announcement price changes. Cheap value stocks increase in price by a larger margin than expensive stocks after beating earnings estimates (e.g., Zhao 2009). The chart below shows where Intel ranks within the market on five crucial valuation metrics:
Intel’s weak 6-month price performance has left it with an attractive value profile. While its sales yield of 39.93% is relatively weak compared to the market median of 55.17%, it’s right inline with the semiconductors group median of 39.93%. INTC is especially attractive from an earnings and free cash flow yield perspective, with both yields more than doubling the respective market medians and tripling the respective group medians. Historically, stocks in the 80-89th percentile of the market in earnings yield generate an excess return of 4.06% – a great sign for the stock going forward. Intel also rewards shareholders with an attractive 3.25% dividend yield. Based on a ranking of their overall relative value profile, we rank INTC in the 78th percentile of all stocks in the market (i.e. slightly above average).
We feel confidently that Intel will beat analyst estimates tomorrow and that the stock is currently at an attractive buying opportunity. It’s weak 6-month price performance is a bad sign from a momentum perspective, but also leave the company with a very attractive valuation. The company has very strong returns on both assets and equity, and has a very attractive buyback and dividend program in place to reward shareholders. Intel also invests a lot into research & development, which depresses its earnings in the short-term but provides numerous long-term benefits. Intel has closed higher on the day following earnings 4 of the last 6 quarters, and has had a positive 7-day price change after each of the last 5 earnings releases.
The appendix below includes Intel’s YoY growth history, as well as a history of its earnings and revenue releases compared to estimates, and finally a snapshot of our 12-month expectations for the stock.
Table 1.1 – INTC’s EPS and Revenue YoY Growth Rates
Table 1.2 – INTC’s history of Wall St. EPS Estimates vs. EPS Actuals
Table 1.3 – INTC’s history of Wall St. Revenue Estimates vs. Revenue Actuals
Table 1.4 – INTC 12-Month Overview
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