To All: This is what Briefing.Com had to say yesterday about Intel.
IMO, Intel is a great play, both short and long term, due to its share price volatility and excellent growth prospects, respectively.
Intel Corp: Maintaining Perspective
Daily commentary updated April 15, 1997
Company Brief
Intel Corp. (INTC 133 3/4) is the leading producer of semiconductors, dominating the market for microprocessors used in
PCs. The company also sells computer modules and boards. After Monday's close, the company reported first quarter FY97
earnings of $2.20 per share on revenues of $6.4 bln, for year-over-year gains of 116% and 39%, respectively. But in the
current market climate such numbers carry little weight. Indeed, the stock is called to open today's session down 2-3 points.
The reason for the chilly reception to the earnings report - the company's concurrent announcement that revenue growth in Q2
will be flat to slightly higher, while gross margins will be flat to slightly lower. The company also stated that gross margins for
FY97 would slip from the record first quarter level of 64.2% to a few points either side of 60%. Though the initial reaction to
the report suggests that the stock could be in for further near-term weakness, our analysis indicates that 1) the market is
overemphasizing the negatives and 2) that the pullback has created an undervalued situation.
Mountains Out of Mole Hills
The drop in Intel shares over the past couple months underscores the market's current obsession with all things negative. Take
for example the scare over AMD's newly launched K-6 chip. Before the product was successfully rolled out (no sure thing
given AMD's recent history), the market assumed that AMD would steal business from Intel and grow its market share to
25%-30%. While they still might accomplish this goal, it should be noted that as of today AMD still hasn't signed on a major
box builder. Meanwhile, Intel's Pentium II chip debuts in May. Combine Intel's leverage with the chief box builders, with its
significant capacity advantage and its plan to cut prices, and a strong case can be made that Intel will maintain its sizeable
market share advantage over its competitors.
Intel also came under pressure when it recently revealed its plan to cut prices. However, in yesterday's conference call the
company suggested that the overall impact of the current price cutting plan would be similar to the one last February. In our
view this should diffuse any anxieties of an all-out price war.
Another concern that seems overblown is the one surrounding the potential slippage in gross margins. First of all, it should
come as little surprise to most of the street that Intel will not maintain gross margins of 64%+ given that the current level
represents a record high, and that the company had already warned that such levels would be unsustainable. It should also be
noted that the rise in gross margins was largely attributable to an improvement in the product mix. However, as it did with the
launch of the Pentium, Intel will increase its motherboard output to support the introduction of the Pentium II. While this
development may pressure margins a bit over the short-term, it will help foster the success of the company's new processor.
Most importantly, even if gross margins slip to the 60% area, the company should have little trouble meeting its earnings targets
of $8.80 in FY97 and $10.34 in FY98.
Masking the Positives
The effect of the all the recent concerns has been to mask Intel's underlying positives. Sales of the recently introduced Pentium
MMX have been extremely successful. With the majority of consumer clients owning 486 units or below, the potential for
growth remains tremendous. Intel also continues to experience strong demand from the corporate client for its Pentium Pro
processor. Again the numbers bode well for Intel, as Pentium-class computers comprise less than 25% of the installed base.
Consequently, it won't take a huge conversion rate for Intel to post another strong year. Finally, international sales remained
strong - particularly in the Asia/Pacific region. Interestingly, the company noted in the conference call that Intel brand
preference in these emerging markets equalled or exceeded that in the mature markets.
Valuations
Of course, the bright side to the pullback is that investors have an opportunity to invest in one of the world's premier
technology companies at a relatively attractive price. Whereas the company traded at 18x estimated earnings when we issued
our initial report on 2/11/97, it now trades at only 15x FY97 estimates. While the company still trades at a multiple above its
historic norm, Intel currently trades at a slight discount to the overall market even though it offers significantly better growth
potential. In addition, the company trades at a steep discount to its industry (see table below) despite dominating its market.
Once the market tone improves, we would not be surprised to see Intel trading at 100% to 110% of its projected long-term
growth rate of 20%. Based on this assumption, we still think the stock has upside potential to the 180 area. Further out a test
of the 200 area is likely, as FY98 earnings are projected to exceed the $10 per share level.
Company Name
Estimated P/E (FY97)
Intel 15
Advanced Micro Devices 30
Cyrix 20
Texas Instruments 26
Micron Technology 35
Risks
Margin erosion materially beyond company target of 60%
Increased competition.
Continued strength in the dollar.
Material slowdown in the global economy.
Further market weakness.
Failure to meet raised expectations.
Conclusion
Despite short-term concerns over the pace of sequential revenue growth and the potential for declining gross margins, Intel's
strong new product cycle, its impressive balance sheet, its quality management team and its growing international presence
should result in another year of record sales and earnings growth. Though the stock could see additional near-term weakness
due to overall market conditions, our analysis suggest that the stock is undervalued given its growth potential and its status as a
market leader. Immediate support is in the 128-125 range, while our long-term upside target is at 180+. |
