SSB:cancellation due to over-ordering,won't ramp P4 rapidly as it depends on RAMBUS, run hot, expensive
From SSB 10/16/00
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 computer
SEMICONDUCTORS motherboard, chipset and memory markets, we now believe
Jonathan Joseph there is a chance Intel reports slightly below recent Q3
guidance of 3-5% sequential revenue growth. We are
reducing our Q3 revenue outlook from 4% to 2% growth and
Dunham Winoto Q3 EPS from $0.38 to $0.37 (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. |
