Here is Osha's report. Courtesy of Albert:
11:02am EST 12-Nov-99 Merrill Lynch (J.Osha (1) 212 449-0930) INTC INTC.GWI
INTEL CORP:Intermediate-Term Opinion Lowered to Accumulate
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
INTEL CORP (INTC/OTC)
Intermediate-Term Opinion Lowered to Accumulate
Joseph Osha (1) 212 449-0930
Accumulate
Long Term
BUY
Reason for Report: Reducing intermediate-term rating
Price: $79 7/16
12 Month Price Objective: $90
Estimates (Dec) 1998A 1999E 2000E
EPS: $1.72 $2.26 $2.55
P/E: 46.2x 35.1x 31.2x
EPS Change (YoY): 31.4% 12.8%
Consensus EPS: $2.26 $2.67
(First Call: 10-Nov-1999)
Q4 EPS (Dec): $0.59 $0.63
Cash Flow/Share: $2.51 $3.18 $3.49
Price/Cash Flow: 31.6x 25.0x 22.8x
Dividend Rate: $0.03 $0.12 $0.14
Dividend Yield: 0.04% 0.2% 0.2%
Opinion & Financial Data
Investment Opinion: B-1-1-7 to B-2-1-7
Mkt. Value / Shares Outstanding (mn): $275,807 / 3,472
Book Value/Share (Sep-1999): $8.40
Price/Book Ratio: 9.5x
ROE 1999E Average: 25.7%
LT Liability % of Capital: 8.0%
Est. 5 Year EPS Growth: 26.0%
Stock Data
52-Week Range: $89 1/2-$50 1/8
Symbol / Exchange: INTC / OTC
Options: AMEX
Institutional Ownership-Spectrum: 44.2%
Brokers Covering (First Call): 32
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: Overweight (13-May-1999)
Income & Growth: Overweight (13-May-1999)
Capital Appreciation: Overweight (10-Feb-1999)
Market Analysis; Technical Rating: Above Average (25-Jun-1999)
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o The number of challenges facing Intel for the next twelve months continues
to mount. Our concerns include Intel's memory roadmap, next year's IA-64
launch and competitive pressure from AMD.
o We are therefore reducing our intermediate-term investment rating from Buy
to Accumulate. Our 2000 earnings per share estimate has been reduced as well,
from $2.69 to $2.55. Our long-term rating of Buy remains unchanged.
o Our price objective has been reduced from $100 to $90, or 35x our forecast
2000 earnings.
Fundamental Highlights:
o We believe that Intel will be forced to respond competitively to AMD in
the coming year, which may put more pressure on Intel's pricing than we had
expected.
o We are also concerned that the launch of the IA-64 will prove
disappointing to investors who have high expectations for the first generation
of that product.
Too many intermediate-term problems to continue with a Buy rating . . .
The number of challenges facing Intel for the next twelve months continues to
mount. We think that the company's attempts to force the market to adopt
Rambus DRAM are faltering, which has possible negative ramifications for
Intel's ability to ramp Coppermine as aggressively as it had hoped. AMD's
early ramp of the K7 appears to be on track, which will necessitate a
competitive response from Intel that could put PIII pricing under more pressure
than we had previously expected. Finally, although we believe that Intel's
long-term success in the enterprise computing market is not in doubt, we think
that the stock price is likely to come under pressure next year as the
relatively modest performance data for the first IA-64 product, the Itanium,
become public.
Taking all of this into account, we think that a more cautious position with
respect to both the earnings outlook and investment stance is appropriate. We
are therefore reducing our intermediate-term investment rating from Buy to
Accumulate. Our 2000 earnings per share estimate has been reduced as well,
from $2.69 to $2.55. Our long-term rating of Buy remains unchanged. Our price
objective has been reduced from $100 to $90, or 35x our forecast 2000
earnings.
Intel's problems with its memory roadmap have been causing us progressively
more concern as the quarter has progressed. Intel is now in the process of
launching its Camino chipset, which supports Rambus DRAM. However, the company
is not going to have a chipset available that provides support for 133
megahertz memory until January, while competing products that support PC-133
are already available from Taiwanese vendors. It remains unclear when Intel
will provide support for double data rate memories, although we believe that
support will be forthcoming.
The attractiveness to memory vendors of selling RDRAM, at least for prices
competitive with 100 megahertz or 133 megahertz DRAM, is hard to understand.
Memory vendors are as busy as they have been since 1995, and they have little
incentive to produce a part that is more expensive to make and more difficult
to test than conventional synchronous DRAM unless they are well compensated.
From a PC manufacturers' point of view, that makes supporting RDRAM more
expensive. The outgrowth of all this is that Intel has tied itself to a memory
architecture that is going to be both expensive and hard to get during the next
several quarters.
AMD's early success with the Athlon is another cause for concern. We have
difficulty believing that AMD will manage to gain much market share against
Intel, much less ship the 25 million processors in 2000 that CEO Jerry Sanders
targeted yesterday. That would imply a market share of 15% according to our
model, far higher than Intel would be willing to tolerate without mounting a
definitive competitive response.
We think that Intel will in fact mount a competitive response, and given
Intel's previous miscues with the Celeron we think that the price/performance
that Intel will offer with the PIII Coppermine in comparison to the Athlon will
be compelling. The problem is that the response will put more pressure on
Intel's PIII pricing. We have revised our average pricing assumption for PIII
desktop during 2000 downwards, from $255 to $233. That is the only change we
are making to our model, but it has the impact of reducing our forecast revenue
from $34 billion in 2000 to $32.6 billion, and our forecast gross margin from
61.9% to 61.3%.
AMD also has more staying power than it did when it was attempting to get the
K6 off the ground, largely because the semiconductor business has improved so
much. AMD now has a profitable flash memory business that it can and will use
to subsidize continued aggressive behavior in the microprocessor market.
Intel's stock price has performed well during the past six months, rising from
a low of $50 to its current level of $80. We think that at $80, the stock does
not have enough upside during the next twelve months to merit a continued
intermediate-term Buy rating.
We caution investors not to interpret our more conservative stance on Intel as
a change to our upbeat assessment of where the semiconductor business as a
whole is headed. We recently revised our growth estimate for the semiconductor
industry in 2000 upwards from 18.6% to 21.5%, and raised our price objectives
for a number of communications-oriented semiconductor companies. The reasons
for our change of stance on Intel are company-specific - our outlook for the
sector continues to be extremely positive. |
