Tomorrows Heard on the Street column:
July 29, 1999
Heard on the Street
Intel Gets a Surprise Boost
From Demand for 'Free' PCs
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
On Wall Street, "free" is often considered a dirty word. But not at Intel,
whose shares have benefited this week from "free" personal-computer
promotions being offered by Internet-service providers.
The offer has been carried lately in newspaper advertisements: Sign up for
three years of Internet service with one of several providers, including
Microsoft, AT&T and CompuServe, and get a rebate of $400 on a
computer at one of a number of big retailers. That's a large enough coupon
to walk out with a brand new -- albeit low-end -- computer.
Hordes of consumers apparently have found the offer irresistible. But it is
the sort of thing Wall Street typically abhors because of the crushing effect
it can have on the profit margins of PC suppliers such as Intel. In a bit of
reverse logic, however, Intel's shares have soared this week on the news
that the promotion has caught on like wildfire and will trigger more
demand. Since Tuesday, Intel's shares have jumped nearly $8 to
$70.3125 on the Nasdaq Stock Market.
Business: Computer-chip maker
Year ended Jan. 1
1999
1998
Revenues (millions)
$26,273
$25,070
Earnings (millions)
$6.07
$6.95
Diluted per-share earnings
$3.45
$3.87
Latest quarter (March 27, 1999)
Diluted per-share earnings: $0.51 vs. $0.33
Average daily volume: 20,461,532 shares
Shares outstanding: 3.318 billion
Trailing P/E: 32 Dividend Yield: 0.2%
It's all a bit ironic. Intel's shares have lagged behind its peer group all year
precisely because of worries about the precipitous drop in
personal-computer prices. But now, some on Wall Street have decided
the sky isn't going to fall after all, even if computer prices are.
Indeed, one prominent Wall Street analyst, who had been bearish on Intel
all year because of margin concerns, upgraded the stock on Tuesday to a
"buy" from "neutral," declaring that PC "freebies" actually are generating
enough of a surge in demand to make up for the lower prices of the
lower-end processors that are included in the giveaway computers.
"The free-PC phenomenon is likely to offset the impact" of deteriorating
prices in the chip business, says Drew Peck, an analyst at SG Cowen, in a
note to clients.
Not everyone is rushing to buy Intel shares. "The acceleration in growth is
at the low end," says Kenneth Heebner of Capital Growth Management.
"This is originating from a trend that's not good for them."
Still, optimism over free PCs is some of the best news for Intel
shareholders in a while. About 18 months ago, the company's shares
started to suffer as Wall Street fretted about the effects of "sub-$1,000"
personal computers. Intel makes about 10 times as much for
microprocessors included in personal computers priced at $1,800 as it
does on the cheaper chips included in computers costing $1,000 and
below.
The story only got worse when news hit the market that
personal-computer prices would fall below $500, dragging down the
average selling price of computers, along with Intel's gross margins, which
hit a low of 49% in the second quarter of 1998.
As a result, Intel shares were trading, until their recent rally, at about 60%
of the average multiple for the sector, or about 23 and 24 times next year's
earnings, Mr. Peck says.
But it turns out the nightmare Wall Street expected hasn't materialized.
Intel's margins have actually been improving over the past year as a result
of its efforts to reduce costs and cut capital spending as it attempts to shift
its business mix to higher-margin chips used in servers and workstations,
rather than those used in personal computers, says Vadim Zlotnikov, an
analyst with Sanford C. Bernstein who is also bullish on Intel.
"This jump in demand will give them time to transition to their new mix
without missing numbers," he says. Translation: The company should be
able to do what Wall Street cherishes most -- meet earnings estimates --
for the next couple of quarters.
What's more, Mr. Peck believes the jump in demand may help turn
sentiment on the stock positive after a long dry spell. "There's been a
stagnation in the personal-computer business," he says, "but this is the first
real sign I've seen of a sustainable turn in 18 months."
On Tuesday, Mr. Peck raised his estimates for Intel's earnings for both the
third and fourth quarters by a total of eight cents, from $2.25 to $2.33 a
share. Even after this week's run-up, he reckons the stock could go as high
as $80 by year end.
Even though the free PCs include Intel's lower-end processor, Celeron,
demand for the units is outstripping expectations. Analysts say that is good
for Intel because its business costs are fixed, so the more chips it sells, the
better its margins become.
"The incremental gross margins on those additional units will be quite high
-- averaging 75% in our model," Mr. Peck said. Intel's overall margin last
quarter was 58.9%.
Analysts say Intel has been mum about the summer's PC giveaway and its
effect on its business. Word mostly is coming out of Taiwan -- where the
motherboards for PCs are assembled -- of a chip-set shortage, says Mr.
Peck. "Taiwan is getting an increase in orders because retailers are seeing
a pickup in demand," he says. |
