Intel Is The Semiconductor Sector's Only Candidate For Estimate Raises, Nomura Says In Upgrade

The PHLX Semiconductor Sector SOX is down about 2 percent year-to-date, underperforming the broader market. Notwithstanding the sector's lukewarm prospects, a Nomura Insitnet analyst found a bright spot in Intel Corporation INTC.

The Analyst

Analyst Romit Shah upgraded Intel from Neutral to Buy and maintained a $50 price target for the shares, suggesting roughly 14-percent upside from current levels.

The Thesis

Intel is likely to be the only semiconductor name in Nomura's coverage universe for which estimates are likely to be raised in October or November, Shah said in the Monday upgrade note. (See the analyst's track record here.) 

The chipmaker is likely to see at least seasonal revenue growth and stronger gross margins through the second quarter of 2019 as supplies remain constrained until the ramp of 10nm, the analyst said. 

The pressure on factories and tight supply of 14nm PC processors that were recently noted by Intel are likely due to several factors, including Specter Meltdown design flaws, the 10nm delay, Apple Inc. AAPL exclusively sourcing the XMM7560 modem and a stronger PC market, Shah said. 

Nomura Instinet views Intel's intention to prioritize the production of Xeon and Core processors for the high-performance segments as positive for earnings and gross margin. The Street's 60-percent gross margin estimate for Q4 and the Q1 of 2019 is conservative, the analyst said.

Citing conversations with U.S. and foreign semi equipment vendors, the analyst said 10nm volumes are becoming "more meaningful."

"This should help alleviate fears about process technology leadership and share loss and drive Intel's multiple higher," Shah said. 

Nomura Instinet's EPS estimates of $4.16 and $4.25, respectively, for 2018 and 2019 are conservative, especially because its model does not assume growth for the data center group in 2019, the analyst said. 

The firm's price target assumes a multiple which is about 5 points below Intel's five-year average discount to the S&P 500.

The discount is warranted given "continued uncertainty around management (CEO search) and concerns over impending competition from Advanced Micro Devices, Inc. AMD in server processors," Shah said. 

The Price Action

Intel shares have shed about 3 percent year-to-date.

The stock was up 1 percent at $44.44 at the time of publication Monday. 

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