Intel Tops Earnings Forecast

Intel (INTC, $15.93, down $1.06) reported earnings after the bell which topped Wall Street’s expectations by a penny. The company reported earnings of $2 billion, or $0.35 a share versus $1.8 billion, or $0.30, from the year-ago period. Revenue came in at $10.2 billion, up just 1% but it was still a record quarter. Although they missed slightly on the revenue number it was still considered a good quarter by many analysts.

Going forward the company was a little cautious on demand in the fourth quarter but their margins continue to improve as the cost of making chips is getting cheaper. Gross margins were at 59% for the quarter, up from 55%.

Make no doubt, Intel is the 800-pound gorilla when it comes to making chips. They control 80% of the market while its smaller rival, Advanced Micro Devices (AMD, $4.27, up $0.06), is struggling to keep up. In fact, AMD recently announced it is spinning off its chip-making factories in order to cut costs and is joining forces with the Persian Gulf state of Abu Dhabi. AMD can no longer fight Intel on its own and the latest move shouldn’t have much of an impact on Intel’s market share. AMD reports earnings on Thursday.

Intel just hit a low of $14 last Friday so there is nothing wrong with going bottom fishing here. The only thing that could be troublesome is the fact the company could miss earnings come next quarter (January 2008) but until then there is a decent chance you could do well going long on Intel. The January 2010 20 calls (WNLAD, $2.17, down $0.23) look very good at these levels and give us over a year to play a rebound in Intel. If Intel can get back to its 52-week high of $27-$28 then you are looking at an easy triple.

The January 2011 20 calls (VNLAD, $3.19, down $0.16) do not expire for another 26 months and would double under the same circumstances. Both plays look solid.

The stock was up 59 cents to $16.52 in after-hours trading so these calls may be a little more higher after the opening bell. However, if you want to wait until after the open, the 2010’s should be in the $2.25-$2.50 range and the 2011’s should be around $3.25. If Intel fails to hold these gains then of course these calls will be cheaper.

Either way, I wouldn’t hesitate to pull the trigger on a trade.

Rick Rouse
Rick@OptionsMentoring.com

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