Trading Earnings: Investors Should Tread Cautiously in Advance of Intel’s Earnings.

Intel’s last quarterly checkup had too many negatives for us to confidently jump in front of the chipmaker’s second quarter earnings announcement. Additionally, INTC’s stock price looks overbought and positioned where it’s due for some profit taking.

Intel Corporation NASDAQ: INTC will report its 2019 second quarter earnings after the market closes on Thursday, July 25, 2019. Wall Street anticipates earnings-per-share (EPS) ranging from $0.83 to $0.93 on revenue from $15.5 billion to $16.65 billion. The consensus outlooks are $0.90 per-share with sales of $15.69 billion. Both are lower than last year’s earnings of $1.04 and revenue of $16.96 billion.

Intel’s guidance for the quarter is $15.6 billion in revenue with EPS of $0.89. Analysts did not move too much off the mark.

Our proprietary model says to expect earnings of $0.92 with sales of $15.87 billion. Honestly, predicting that the semiconductor maker is going to top the street’s expectations is no big deal. Management is very good at setting the bar as the company exceeded bottom-line numbers for years and the top-line view in six of the last eight quarters.

How investors react will come down to the details. Let’s examine INTC’s first quarter results to look at the specifics.

The initial thing to look at are margins. In the first three months of 2019, cost of sales rose to 43% of sales, compared to 40% in the last quarter of 2018. It’s also considerably higher than 2018’s first-quarters gross margin of 39%.

We see the same upward trend in operating expenses. In the last quarter, this line-item grew to 31% compared to 27% in the last three-months of 2018. However, they were lower than 33% a year ago. Fortunately, the bulk of the increase is attributable to Research and Development, but Marketing, General, and Administrative (MG&A) are on the rise, too. Nonetheless, the trend is not Intel’s bottom-line friend at the moment.

Perhaps the most troubling thing we see is a steady march higher in Accounts Receivables, moving from 27% to 28% to 36% to 43% of revenue during the last four quarters. That could be a sign Intel’s customers are struggling a little bit and taking longer to pay their invoices.

A hefty bump higher in inventory, especially for Works in Progress and Finished Goods, could continue to squeeze margins. Works in Progress inventory increased to 30% of revenue compared to 24% in the fourth quarter, and 25% during the same timeframe a year ago. Although Finished Goods rose to 14% of sales in for January through April compared to 10% for October through the end of 2018, they are flat year-over-year.

Even though Intel’s Income Statement and Balance Sheet from their most recent quarterly report show some warning signs, investors have been bullish on the chipmaker since early June. The stock has climbed from $43 and changed to $52.61 as of this writing.

If earnings can punch the stock through and close above $53.09, it will enter an empty space of a gap down. INTC closed trading on April 25, 2019 at $57.26 and opened trading at $52.74 the following day. All the empty space in between is called a gap down. Shares settled for the day at $52.11 on April 26, 2019 with an intra-day high of $53.09.

First-quarter’s checkup was the reason traders went red on INTC shares as management warned, “We’re taking a more cautious view of the year, although we expect market conditions to improve in the second half.” Well, the second half of the year is here, and investors will eagerly wait on forward guidance.

Our concern is that good news is already priced into INTC shares with the stock up more than 20% in the last two-months.  As it is, Relative Strength is already above 70, a space that usually doesn’t last too long. A reading of more than 70 is generally considered an overbought condition, setting the stock up for some downside.

In fact, Intel’s price action around three of the last four earnings releases has been bearish.

As we mentioned already, its priced slipped more than 10% in the days surrounding their last quarterly announcement, down almost 2% the quarter before that, up more than 7%, and then falling close to 9% in the previous two earnings reports, from the most recent back.

Our Outlook: Even though we anticipate Intel Corporation NASDAQ: INTC will report sales and EPS above the consensus outlook, pressure on margins, growing accounts receivables, and increasing inventory could weigh on results. Meanwhile, the stock could be price for perfection due to its 20% rise in the last couple of months.  In our opinion, there are too many red flags in Intel’s first quarter financial statements for perfection.

Investors might be wise to take a wait and see approach. If the stock can close above $53.09-ish on results, it could be a straight shot to $57 and change, closing the gap we highlighted above. Should traders react negatively, INTC shares could fall and find support at the 50-day moving average of $47.