Intel Isn't Out Of The Woods, Bernstein Says In Downgrade

Intel Corporation INTC is scheduled to report first-quarter 2016 earnings April 19. While analysts have recently been debating about the possibility of a pre-announcement for the company based on "deteriorating industry datapoints," no pre-announcement has been made or set. However, analysts at Bernstein Research led by Stacy Rasgon, do not see this as a clear sign that Intel is on the upswing.

"[W]e do not believe this means the company is necessarily out of the woods," Rasgon began in a recent research note. "[W]e believe the short case has become more attractive here. We take our numbers down, and lower our target price to $26 (maintaining our 12x multiple on our new 2017 estimate of $2.18). We consequently downgrade to Underperform."

Related Link: BlueFin Warns Intel Negative Pre-Announcement A "Strong Possibility"

Justification For The Rating And Valuation

Bernstein offered three main points supporting the new thesis:

1. Weak Q1 Isn't Ruled Out: Simply because there has been no pre-announcement does not mean the first-quarter results will be strong, or even mediocre. "And more importantly," said Rasgon, "we believe Q2 numbers look too high even if Q1 was fine as the Street may not be appropriately modeling the loss of the extra week from the prior quarter (and of course things don't really look fine." The analyst stated that it is more likely for a "meaningful reset" after the company guidance in April.

2. "Hail Mary Plays" In The Playbook? "While Intel is good at pulling rabbits out of hats, they may find it tougher now. Inventories have ballooned over the last year, increasing the risk of underutilization in the event of cuts. Receivables have once again spiked. And of course there are already resorting to accounting changes that are in part serving to mask deterioration."

3. Lack Of Support In Valuation: "The shares aren't necessarily expensive, but neither are they cheap," the analyst said.

Rasgon concluded, "Intel's PC growth trajectory remains challenging with new products having little to no impact on demand, and datacenter appears to be weakening meaningfully vs the company's long term goals. Additionally, we believe a meaningful reset to full-year estimates is possible when the company reports earnings in April. We rate the shares Underperform with a $26 target price."