Goldman Sachs Cut Intel (INTC) Estimates; Recommends Buying Puts on Preannouncement Risks
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(Updated - June 12, 2015 8:33 AM EDT)
Goldman Sachs analyst James Covello cut Q2 and 2015 estimates on Intel (NASDAQ: INTC) on ODM weakness, elevated channel inventory.
Covello commented, "When Intel provided 2Q guidance, management indicated that it expected to undership PC demand in 2Q15 in order to work down excess channel inventory. Since Intel’s report, demand has further deteriorated, as evidenced by recent weak ODM data (details below). As a result, we believe channel inventory remains elevated and 2H15 will be weak as well. Taken together, we believe that it will be challenging for Intel to meet 2Q guidance (for total sales up 3% qoq) and/or to grow 2H sales by ~15% hoh (vs. seasonality of up 8%), due to both excess supply and weaker demand. We lower 2015E EPS to $2.10 from $2.20."
The analyst noted shipment data was well below expectations for May, suggesting elevated channel inventory levels. ODMs have reported May monthly sales, and total notebook shipments were up only 7% mom, the analyst noted.
Covello sees downside risks to 2Q ODM NB shipment guidance. "The top 5 ODMs originally guided June quarter notebook shipments to grow 10% qoq on average (ranging from flat to up 15-20% qoq). Given weak QTD data, NB shipments would now have to grow 36% mom in June to reach full-quarter guidance (vs. seasonality of up 13% mom)... We forecast June shipments
to grow 20% mom and we expect 2Q15 NB shipments to be up 4% qoq (below original guidance for up 10% qoq)."
Lastly, the analyst sees no pick up from the Windows 10 launch in July. "We remain skeptical that Windows 10 could catalyze above-seasonal 2H shipments, as our analyses show that variability in PC shipments has been historically correlated with macro factors (and not the timing of Windows releases)," the analyst said.
The firm reiterated a Sell rating and $23 price target on INTC. Options strategists at Goldman are recommending buying INTC puts to hedge elevated preannouncement risks. "Buy INTC July $32 puts, pay $1.00 (3%, stock $31.96); we believe the options market is underestimating the potential for management to negatively preannounce in the coming weeks," strategists Katherine Fogertey and John Marshall said.
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