Tech Battle: IBM & Intel

IBM Corp.

Q2 Rev. Est.:  $24.11 Bil

Q2 EPS Est.:  $2.54

Analysts, on average, are forecasting second-quarter revenue of $24.23 Bil with an EPS of $2.58.  Both of these figures are slightly higher than my estimates of $24.11 Bil and $2.54, respectively.

In order to arrive at the above estimates, I averaged the results of four types of statistical regression:  First-Order Linear, Deseasonal, Dummy Coding, and Autoregression, as summarized in Table 1, below.

Table 1

Q2 Prediction
Model	Prediction
First-Order		$24,745
Deasonal		$24,546
Dummy		$24,834
Lagged		$22,294
AVERAGE		$24,105

After the Q2 revenue prediction was finalized, the next step involved using common size analysis to create the pro-forma income statement.  Despite the fact that IBM is a large and relatively mature company in the Technology sector, their earnings as a percentage of revenue is somewhat volatile.  Given this, I have confidence that each line of the below income statement is a good prediction of the quarter’s actual results. 

Income Statement
Three months ended June 30, 2010
Revenue	$24,105
Cost of Revenue	$13,105
Gross Profit	$11,000
Operating Expenses:
SG&A	$5,335
R&D	$1,463
Int. Property	-$292
Other Ex	-$155
Interest Ex	$87
Total Expenses	$6,438
Income before Taxes	$4,562
Provision for Taxes	$1,189
Net Income	$3,372
Diluted EPS	$2.54

IBM Corp. will report earnings on July 19, 2010 after the market close.

Trading Recommendation:  Buy Puts

Intel Corp.

Q2 Rev. Est.:  $10.33 Bil

Q2 EPS Est.:  $0.45

Analysts, on average, are forecasting second-quarter revenue of $10.26 Bil with an EPS of $0.43 for Intel ("INTC").  Both of these figures are slightly lower than my estimates of $10.33 Bil and $0.45.

When arriving at the Q2 revenue forecast, I once again averaged the results of the First-Order Linear, Deseasonal, Dummy Coding, and Autoregression models.  However, unlike the models created for IBM, the models for Intel resulted in a much lower level of significance (R^2).  The absolute average of the company's EPS surprises over the past year is 63%.  This shows just how volatile Intel’s revenue can be from one quarter to the next.  Given this unpredictability, I will not be giving a Trading recommendation for INTC. 

Below is a summary of the composition of the Q2 revenue estimate (Table 2) as well as the projected income statement (Table 3).

Table 2

Q2 Projection
Model	Prediction	W/ St. Err.
First-Order	$9,403	$10,466
Deasonal	$8,899	$10,256
Dummy	$8,884	$9,974
Lagged	$9,528	$10,627
AVERAGE	$9,179	$10,331

Table 3

Income Statement
Three months ended June 30, 2010
Net Revenue	$10,331
Cost of Sales	$3,713
Gross Margin	$6,617
R&D	$1,570
MG&A	$1,469
R&D AND MG&A	$3,038
AMD Settlement	$0
European Commission Fine	$0
Restructuring & AI Charges	$0
Amortization	$12
Operating Expenses	$3,050
Operating Income	$3,568
Gains/(Losses) on Investments	-$10
Interest and other, net	$17
Income Before Taxes	$3,575
Provision for taxes	$1,033
Net Income	$2,543
Diluted EPS	$0.45

Intel Corp. will report earnings on July 13, 2010 after the market close.

Trading Recommendation:  None


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IBM/INTC Ownership

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Disclaimer:
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.