Chip-making giant Intel (INTC) boosted investors hopes of a recovery after releasing better-than-expected quarterly earnings and issuing a healthy forecast. Shares rose 6.5% in Wednesday morning trading.

On Tuesday evening, the Dow component reported a second-quarter profit of 18 cents a share. (The figure excludes certain charges, including a 10-cent a share impact from a fine imposed by the European Commission.) The numbers handily beat Wall Street analysts' projections that it would post a profit of 8 cents a share. Revenues climbed 12% quarter over quarter at $8 billion, ahead of analysts' expectations of $7.23 billion.

But it was Intel's healthy outlook that really ignited investors.

"Our second quarter results were clearly better than we expected with demand strengthening throughout the quarter, CEO Paul Otellini said on a Tuesday conference call."While the global economic environment is still recovering, our customers signaled increased confidence for a seasonal second half with their ordering patterns."

The company's projection that its third-quarter gross margin would hit 53% was especially appealing to Needham & Co. analyst Edwin Mok, who said the company was able to avoid cutting prices and even managed to regain some pricing power. "We believe fourth-quarter 2009 margins will further expand to a normalized level of 55%-60%," he wrote.

Analysts like Kaufman Brothers' Ted O'Neill view Intel's results as a proxy for the chip making industry, one that signals a turning point in the semiconductor cycle.

Mok, however, believes Intel's performance will soon expand past the traditional semiconductor cycle. He projects that the company will sell more expensive chips next year despite the rising popularity of lower-margin netbook computers.

Microsoft (MSFT)] Windows 7 ready, aging enterprises-installed base and weak IT spending this year, we believe there is pent-up demand for enterprise PC in 2010," which will help increase Intel's margins.

Bottom Line: Buy
Intel is a market leader, and it's clear that demand for chips is starting to gain some momentum.

Appetite for Yum Brands is Lost Following Outlook

Shares of Yum Brands (YUM), the corporate flagship of fast-food chain KFC, were battered Wednesday despite quarterly earnings that beat Wall Street's estimates. Shares fell 4.3% in midday trading.

The Louisville, Ky.-based company, which also owns the Pizza Hut and Taco Bell brands, posted earnings of 50 cents a share, up from 45 cents a year ago Tuesday evening. Analysts on average expected the company to report a profit of 45 cents a share. Revenue, however, came in slightly below estimates of $2.5 billion, at $2.48 billion.

Looking forward, Yum said it was staying the course on its guidance for the year -- a signal to some investors that the company sees limited prospects for growth. The company expects 10% earnings growth for the year, or $2.10 a share. Analysts on average were expecting full fiscal year earnings of $2.12 a share.

Chairman and CEO David Novak said on a Tuesday call that although U.S. same-store sales fell 1% and worldwide restaurant same-store sales fell 4%, currency adjustments show a 3% world-wide increase. Also, margins worldwide widened 1.7 percentage points, helped by prior-year pricing, flat commodity costs and refranchising.

"All in all, this will be a year where profits are up and sales are sluggish," Novak said. "Our 10% EPS growth target, which was viewed to be somewhat aggressive, is still intact."

Jeff Farmer, an analyst at Jefferies & Co., didn't see the news quite so positively. Double-digit growth in China isn't sustainable, he said in a Wednesday note. Nor are the low food prices there that helped fuel those results. He also said the sustained full-year forecast includes a six cents a share tax benefit and about three cents a share in favorable currency shifts.

Bottom Line: Hold
Let the market settle a bit before making any moves. Yum still has solid market share in China, but it's not the first company to rely too much on growth from a country whose economy is even more volatile than our own.