John
here it is
Regards
-Albert
01:33pm EDT 2-Oct-00 Merrill Lynch (J.Osha (1) 415 676-3510) INTC INTC.GWI
INTEL CORP:Change in Roadmap (10-02-00)
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
INTEL CORP (INTC/OTC)
Change in Roadmap (10-02-00)
Joseph Osha (1) 415 676-3510
ACCUMULATE* Long Term: BUY
Reason for Report: Company Update
Investment Highlights:
o INTC has cancelled plans for the Timna processor; we have also heard
reports that it is pushing out the P-IV to later in 4Q.
o We believe that the company made the decision to cancel Timna because of
1) a history of production difficulties, 2) marginal support for the product,
and 3) difficulty in positioning the product vis-a-vis Celeron.
o In our view, both developments should not result any significant financial
impact in 4Q, but we believe they highlight the extent to which INTC is trying
to improve its communications with the PC channel, which has been poor up to
this point.
o Because both products would have low gross margins, we believe that both
of this roadmap change could actually help gross margins.
o Our 3Q EPS and 4Q EPS estimates remain $0.39 and $0.42, respectively. We
maintain our Accumulate/Buy rating.
Price: $41.56
12 Month Price Objective: $70
Estimates (Dec) 1999A 2000E 2001E
EPS: $1.17 $1.66 $1.77
P/E: 35.5x 25.0x 23.5x
EPS Change (YoY): 41.9% 6.6%
Consensus EPS: $1.66 $1.76
(First Call: 28-Sep-2000)
Q3 EPS (Sep): $0.28 $0.39
Cash Flow/Share: $0.53 $1.75 $1.93
Price/Cash Flow: 78.4x 23.7x 21.5x
Dividend Rate: $0.02 $0.06 $0.07
Dividend Yield: 0.1% 0.1% 0.2%
Opinion & Financial Data
Investment Opinion: B-2-1-7
Mkt. Value / Shares Outstanding (mn): $291,127.8 / 7,005
Book Value/Share (Jun-2000): $5.23
Price/Book Ratio: 7.9x
ROE 2000E Average: 25.9%
LT Liability % of Capital: 9.7%
Est. 5 Year EPS Growth: 26.0%
Stock Data
52-Week Range: $75.81-$32.50
Symbol / Exchange: INTC / OTC
Options: AMEX
Institutional Ownership-Spectrum: 45.2%
Brokers Covering (First Call): 24
*Intermediate term opinion last changed on 12-Nov-1999.
For full investment opinion definitions, see footnotes.
Intel cancels Timna, and P-IV looks late - no financial impact, though
Intel officially announced the cancellation of its Timna microprocessor project
on Friday - the Timna has been intended to compete in the low-end PC market,
and Intel has decided that the market opportunity no longer merits releasing
the product. Separately, industry sources are claiming that Intel has delayed
the launch of its P-IV microprocessor by approximately a month, until the end
of November. Neither development is going to have a meaningful impact on
Intel's financial performance in the fourth quarter - we had not factored much
Timna into our model at all, and P-IV was not scheduled to ramp in earnest
until 2001 anyway. Both developments do, however, highlight the extent to
which Intel is still struggling to improve its communications with PC OEMs and
refocus its mpu business after a series of ill-considered initiatives.
We had not been factoring much Timna into our model...
It was never clear to us why Intel was developing Timna in the first place, and
as a result we never incorporated aggressive assumptions for Timna revenues
into our model. Intel suffered following the introduction of its Celeron line-
up, which high-end Celerons began to cannibalize the low-end of the P-III
business. The introduction of the Timna would have created the same set of
problems all over again, and Timna would likely have generated lower gross
margins for Intel than Celeron. We do not agree with Intel's assertion that
demand for low-price microprocessors does not exist - rather, we believe that
Intel has decided that it would rather not engage price-aggressive competitors
such as Via and National Semiconductor, especially at the risk of impacting
Celeron sales. The questionable decision to have Timna support RDRAM also has
created problems, as Intel has been working to correct problems with the memory
translator hub, delaying Timna's launch.
...and P-IV volumes for the fourth quarter were not going to be that high
either
We are a little surprised that so much attention is being given to the reported
P-IV delay, since Intel was never going to get enough P-IV into the market by
the end of the year to have much of an impact anyway. We had only been
modeling a few hundred thousand units during the fourth quarter. However, our
checks indicated that PC OEMs planned to have P-IV based products on sale for
the holidays, and a late November launch date makes that essentially
impossible. We have not been able to confirm industry reports to the effect
the launch date is, in fact, November, and Intel's wide time window for the
launch eliminates any need for an official comment from the company. Yet, our
earlier checks with both PC companies and distributors had indicated that the
product was expected in October.
Positive impact on gross margin - over the short term
Interestingly, the Timna cancellation and the P-IV launch snafu should have
positive financial implications for Intel, at least over the short term. Our
checks indicate that the P-IV die will be approximately 200 sq. mms, much lower
that P-III. Timna would have carried lower gross margins than Celeron, let
alone P-III, and canceling that product takes some pressure off of Intel's
gross margin, which will be under enough pressure anyway as it enters 2001.
Bad calls at Intel are continuing to affect the company
We continue to believe that all of Intel's recent problems, including the two
we've been writing about, flow from two bad decisions by Intel management. The
first decision was to push RDRAM into the PC market before the standard was
commercially viable, and to use RDRAM even for low-end products such as Timna.
There were other questions surrounding Timna, of course, but the delays
associated with getting the memory translator hub to work are what finally
killed the product. Intel's other bad decision was to reduce capital spending
for three years, from 1997 to 1999, before reversing in spectacular fashion in
2000 to nearly double cap ex. Had Intel not underinvested, it would have had
enough additional capacity to begin ramping P-IV sooner. Unfortunately, delays
associated with bringing P-IV online have resulted in the end-of-the year
scramble that is now leaving prospective P-IV buyers empty-handed for the
holiday. |
