Intel is expected to narrow its guidance in its mid-quarter update this Thursday, with inventory being the key catalyst for its Q4.

In a Goldman Sachs report today, semiconductor analyst Andrew Root said that falling flat panel prices and steady server volume will help the chipmaker's units and product mix, saving its December quarter and pulling up its stock price for January stability.

"What we do not believe the market has priced into the stock yet is upward revisions to consensus gross margin expectations for 2005 that would result from inventory ending the year at less than 70 days," Root said. "Intel's inventory build in Q3 was driven by overproduction and a tepid demand outlook that caused customers to cut back on MPU inventory. Our checks suggest Intel indeed cut back on production, with output since the beginning of September being well below seasonal patterns."
 
In addition, the firm's report said that the better product mix that appears to be happening for Intel in Q4 could once again allow it to eliminate some inventory from its books through a reserve, while still meeting its 56 percent gross margin midpoint, near-flat on a quarter-over-quarter basis. Specifically, Root's report noted that MPU units have been coming in ahead of Intel's original plan as OEM demand has trended slightly above expectations on better notebook and server units, and that notebook production in particular has benefited from the oversupply in flat panels and in prices.

"We expect a combination of slightly higher unit shipments in Q3, lower production output, and better mix allowing inventory reserves will catalyze Intel stock returning to free cash flow fair value ($29) in the near term," he added.

Goldman Sachs expects Thursday's update to reveal a guidance range $8.8 billion to $9.1 billion (up 4 percent to 7 percent), from its previous range of $8.6 billion to $9.2 billion (up 2 percent to 9 percent). Intel's stock opened at $23.30 this morning.

By: DocMemory
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