09:55am EDT 16-Oct-00 Salomon Smith Barney (Jonathan Joseph 415-955-4998) INTC
INTC: Reduce Estimates and Target price
SALOMON SMITH BARNEY
Intel Corporation (INTC)
INTC: Reduce Estimates and Target price 2M (Outperform, Medium
Risk)
Mkt Cap: $282,902.3
mil.
October 16, 2000 SUMMARY
* Given the on-going weakness in the personal
SEMICONDUCTORS computer motherboard, chipset and memory markets, we
Jonathan Joseph now believe there is a chance Intel reports slightly
415-955-4998 below recent Q3 guidance of 3-5% sequential revenue
jonathan.joseph@ssmb.com growth. We are reducing our Q3 revenue outlook from
Dunham Winoto 4% to 2% growth and Q3 EPS from $0.38 to $0.37
415-951-1875 (versus $0.28).
* More importantly, the company continues to rapidly
expand capacity at a time when demand is coming in
much weaker than anticipated, which we believe will
have a leveraged and negative impact on margins in
Q4 and in 2001.
* We are trimming our Q4 EPS estimate from $0.40
(versus $0.35) to $0.37 on a 100bp gross margin
reduction to 61% and 2001 from $1.75 to $1.55 on a
250bp gross margin reduction to 59.5%, which may
result in down earnings for the company next year.
FUNDAMENTALS
P/E (12/00E) 25.4x
P/E (12/01E) 26.1x
TEV/EBITDA (12/00E) NA
TEV/EBITDA (12/01E) NA
Book Value/Share (12/00E) $5.23
Price/Book Value 7.7x
Dividend/Yield (12/00E) $0.06/0.1%
Revenue (12/00E) $33,592.0 mil.
Proj. Long-Term EPS Growth 25%
ROE (12/00E) NA
Long-Term Debt to Capital(a) 2.3%
INTC is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (10/13/00) $40.38 Current Rating 2M
52-Week Range $74.88-$32.56 Prior Rating 2M
Shares Outstanding(a) 7,006.0 mil. Current Target Price $50.00
Convertible No Previous Target Price $75.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/99A Actual $0.29A $0.26A $0.28A $0.35A $1.16A
12/00E Current $0.36A $0.50A $0.37E $0.37E $1.59E
Previous $0.36A $0.50A $0.38E $0.40E $1.64E
12/01E Current $0.37E $0.38E $0.39E $0.41E $1.55E
Previous $0.40E $0.43E $0.46E $0.47E $1.75E
12/02E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/00E $1.66; 12/01E $1.76; 12/02E NA
SUMMARY (CONTINUED)
* Given that Intel's stock has been virtually cut in half last six weeks, there
is no change to our rating. We are, however, cutting our price target from
$75 to $50, still 32x our new out-year estimate.
STILL LOTS OF WEAKNESS IN THE CHANNEL
The much hoped for mid-October pickup in personal computer demand has failed to
materialize, which suggests to us Intel's guidance on its Tuesday afternoon
conference call will be more cautious than most investors anticipate. There is
not much out there to tout for the company: Europe is weaker than anticipated,
U.S. corporate is coming in lighter than forecast, and even Asia appears to be
weakening (Via Technologies, the leading chipset supplier in Taiwan recently
guided down for Q4). The recent shortfall relative to plan is therefore turning
out to be a one-two punch: the company has been getting cancellations due to
over-ordering during the shortage over the last year while Intel's customers
are seeing a sharp falloff in demand themselves. Given that Q4 is traditionally
a strong quarter, we still expect sequential revenue growth of about 4%
(trimmed from our earlier 5% estimate), but it is now conceivable that Q1 could
decline from Q4, setting up for a soft overall 2001.
MEANWHILE CAPACITY IS A RUNAWAY TRAIN
A shortfall in unit demand relative to forecast is not unusual in any market.
However, the shortfall could not come at a worse time for Intel. The company
has just increased capital spending 71% to $6 billion to overcompensate for the
shortage they thought their customers were experiencing over the last year.
Meanwhile, we figure the company is coming in 10-15% over-capacity in Q3 and
perhaps 15-20% over-capacity in Q4. This unabsorbed capacity will likely have a
negative impact on margins in Q4 and into 2001. It seems only common sense that
Intel will soon be forced to cut capital spending to reduce excess capacity.
Even so, it is probably too late to expect there will be no impact to the near-
record gross margins the company has been running lately.
OTHER PROBLEMS LOOMING
The weakness we have begun to see at Intel should lead into other problems we
expect to see at the company in the next couple of quarters. 1) Competition
over the next 12 months will be fierce as Advanced Micro# (AMD, $21.88, 2S)
ramps capacity sharply and other players, like Via Technologies, increase
output of x86 processors. All in the face of a slowing PC market. 2) Intel will
not ramp the new P4 very rapidly, given that it is Rambus DRAM dependent (a
highly unpopular memory), is a big chip, runs hot and is expensive in this
generation to manufacture. By mid-2001, the company should have a PC-133
capable chipset. Until then, it is dependent on the Pentium III to continue to
push up the Gigahertz scale, something it was never designed to do. As a
result, the company may suffer ASP erosion until the P4 ramps in volume.
CHANGES TO THE MODEL MOSTLY MARGIN DRIVEN
We reduced our Q3 EPS estimate from $0.38 to $0.37 and revenues from $8.63
billion (up 4% qoq and up 18% yoy) to $8.47 billion (up 2% qoq and up 16% yoy).
Most of the reduction comes from lower revenues and a 100bp reduction in gross
margins. We also cut our Q4 EPS estimate from $0.40 to $0.37 and revenues from
$9.06 billion (up 5% qoq and 10% yoy) to $8.81 billion (up 7% yoy and 4% qoq),
and trimmed margins by 100bp to 61%. Finally, we cut our 2001 EPS estimate
significantly from $1.75 to $1.55 and revenues from $38.37 billion (up 13%) to
$37.45 billion (up 12%). We cut sharply 2001 gross margins from 62% to 59.5%
and operating margins from 32.4% to 27.9%. All of these earnings estimate
changes are based on operations and do not reflect any marginal change in
contribution from non-operating income like the sale of securities. |
