Intel plunges on negative earnings news
Expect reverberations throughout the tech sector
by Michael Brush
Heads up! The earnings warnings we have been
cautioning you about in the past two weeks are here.
And it doesn't look good.
Bellweather chip maker Intel (NASDAQ: INTC) warned
after the market's close Wednesday that first quarter
revenue will be 10% lower than expected, largely
because of a slowdown in demand from personal computer
makers. The stock was initially halted, and then
dropped about $10 once after-hours trading began.
The announcement will catch many investors off guard
because they have been comforted by Intel's recent
efforts to talk down expectations -- and lulled into
thinking the worst news was out. But the writing was
on the wall, in the form of news this week that
inventories are building at Compaq Computers (NYSE:
CPQ).
"Intel had already been guiding estimates down, so
this will be a surprise," says Carl Wiese Hokanson
Capital Management in Encinitas, Calif. "It is going
to wash through all the chip stocks. All these chip
stocks have rallied and now we have a disappointment."
Despite the solid growth at Dell (NASDAQ: DELL),
doubts about PC sales arose earlier this week when
speculation circulated that product is piling up at
Compaq. "With Compaq the rumors have been that the
channel inventories are high, and obviously they are a
big purchaser of Intel chips," says Wiese. "We are
seeing too much inventory among the PC manufacturers."
In addition to lower revenue, Intel says gross margins
will be around 53%, lower than earlier expectations.
In the long run, the company said, margins should stay
around 50%. Intel also said costs related to its
acquisition of Chips and Technologies Inc. will reduce
earnings by about $165 million, or 9 cents per share,
in the first quarter.
The news should send chip stocks on a roller coaster
ride. Many traded higher Wednesday on news that
Robertson Stephens had increased its rating in Micron
Technology (NASDAQ: MU) (see below). Micron and other
chip stocks rose on the news, even though Robertson
Stephens analyst Niles warned another sell off in the
sector would bring better buying opportunities some
time in March.
His prediction may come true sooner than he thought.
Chip stocks surge on Micron upgrade
Still, that doesn't mean you should buy just yet
By Michael Brush
Semiconductor stocks showed good strength Wednesday,
but even the analyst who stirred up all the interest
says you shouldn't be buying just yet.
Despite an overall weakness in the tech sector, many
chip stocks bounced up nicely Wednesday on news that
BancAmerica Robertson Stephens analyst Dan Niles
upgraded semiconductor maker Micron Technology (NYSE:
MU).
His reasoning: Japanese chip makers have slowed down
their orders for equipment. That means their
production will be coming down as well, bringing
supply and demand back in line by the end of the year,
predicts Niles.
"We believe that cutbacks in capital expenditures will
lead to demand outstripping supply by year end...and
firm up prices as we work our way through 1998," Niles
says. Before then, though, a couple of things will
happen that will knock the stuffing out of these
stocks once again. They are:
* Japanese DRAM makers will dump inventory as they
reach the end of their fiscal year in March.
* Near-term estimates for Micron will be reduced by
other brokerages after the company announces earnings,
scheduled for March 17. This quarterly profit release
should be the low point for earnings, and also the
stock, says Niles.
* Other tech companies will preannounce or guide down
estimates in March.
After these events, Micron will "become much easier to
own," says Niles. Indeed, he thinks in the near term
the stock could slip back down to $30 or lower,
creating a much better buying opportunity than that
realized by investors picking up the stock today.
"We would accumulate the position slowly and
patiently as the stock continues to decline," he says.
Those who wait should be amply rewarded if Niles' view
on the stock is correct. He says it will reach $45
within 12 months.
The semiconductor sector has recovered recently since
the selloff that peaked last December, but many
analysts, including Tom Kurlak of Merrill Lynch, have
been predicting things would get worse again before
they got better.
See Jan. 30's Money Daily at:
pathfinder.com
for more.
The reason, supply is still much greater than demand,
and many of the big Korean chip makers plan to
aggressively exploit the weakened Korean currency to
increase their global sales.
In addition, the bounce in DRAM prices earlier this
year that brought the stocks back up was just a false
alarm, they say. DRAM supply and pricing was driven to
artificially low levels late last year before the
recent bounce -- as Asian producers dumped inventory
to raise much-needed cash, and computer makers did the
same because of doubts about personal computer demand.
But that overreaction lead to a temporary shortage in
the market, when then caused DRAM prices to bungee
jump back up earlier this year. That gave a false
impression that underlying fundamentals were getting
better. But the overall conditions of oversupply did
not really go away. The imbalance probably won't be
corrected until later this year or 1999, depending on
whom you listen to. But the semiconductor stocks
should recover before that since investors price in
conditions six to 12 months ahead of time.
Anyone investing in chip stocks like Micron should
keep in mind the usual warnings. The industry is
highly cyclical, it is largely dependant on the cycles
in PC sales, and a strengthening of the dollar against
the yen or Korean won can lower DRAM prices, which can
hurt some producers. That said, there is no better
time to buy than the bottom, assuming you have the
patience to wait for it. |
