John - here is <font color=red>Osha's report
I found Message 14607926
as more amusing
Regards
-Albert
07:44am EDT 18-Oct-00 Merrill Lynch (J.Osha (1) 415 676-3510) INTC INTC.GWI
INTEL CORP:The sky is not falling,but next year looks tough
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
INTEL CORP (INTC/OTC)
The sky is not falling,but next year looks tough
Joseph Osha (1) 415 676-3510
ACCUMULATE* Long Term: ACCUMULATE
Reason for Report: 3Q00 Earnings Report
Investment Highlights:
o Intel came in ahead of very low expectations, posting solid results of
$0.41 on $8.7 billion in revenue.
o We are hiking our Q4 earnings estimate from $0.42 to $0.43 on better non-
operating income, although we've cut our revenue estimate slightly.
o Q4 looks fine, but 2001 is a different story. We are cutting our 2001
estimate from $1.77 to $1.64. Our long-term rating has been cut from Buy to
Accumulate.
Fundamental Highlights:
o Expectations for fourth quarter revenue were decent relative to low
expectations - a modest seasonal pickup in microprocessor is underway.
o The big, expensive P4 die will begin to ramp in 2001, and we expect the
initial impact on gross margin to be negative. Intel's sharply increased
capital spending will begin to push depreciation up as well.
Price: $35.69
Estimates (Dec) 1999A 2000E 2001E
EPS: $1.16 $1.69 $1.64
P/E: 30.8x 21.5x 21.7x
EPS Change (YoY): 46.1% -3.0%
Consensus EPS: $1.65 $1.75
(First Call: 16-Oct-2000)
Q4 EPS (Dec): $0.35 $0.43
Cash Flow/Share: $1.35 $1.89 $1.74
Price/Cash Flow: 26.4x 18.9x 20.5x
Dividend Rate: $0.02 $0.06 $0.07
Dividend Yield: 0.1% 0.2% 0.2%
Opinion & Financial Data
Investment Opinion: B-2-1-7 to B-2-2-7
Mkt. Value / Shares Outstanding (mn): $250,079.8 / 7,007
Book Value/Share (Sep-2000): $5.38
Price/Book Ratio: 6.6x
ROE 2000E Average: 29.4%
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: 44.7%
Brokers Covering (First Call): 24
For full investment opinion definitions, see footnotes.
Disaster fails to materialize - next year looks tough, though
Intel reported earnings for the third quarter that were slightly ahead of our
expectations, with revenue of $8.73 billion as compared to our estimate of
$8.64 billion, and earnings per share of $0.41 as compared to our estimate of
$0.39. The better earnings performance was driven by gross margin and non-
operating income performances that beat our estimates. For the fourth quarter,
we are trimming our revenue estimate from $9.71 to $9.31 billion. However,
higher anticipated non-operating income and a lower share count actually pushed
our EPS estimate up by a penny, to $0.43. Our stance on the stock for the
fourth quarter remains moderately positive - Intel's comments confirm our own
belief that PC demand during the fourth quarter should see a seasonal recovery,
albeit a soft one. We expect the stock to trade well through the fourth
quarter as news flow from the PC business improves sequentially. We reiterate
our intermediate-term Accumulate rating. We are cutting our long-term rating
from Buy to Accumulate.
Growth came from non-MPU businesses
Intel's microprocessor business showed flat unit shipments and flat ASP during
the quarter - our model shows unit shipments of 29.8 million units at an
average selling price of $215. The sequential increase in revenue came from
non-microprocessor businesses, most notably flash memory. Gross margin was
almost 200 basis points higher than we had expected, and combined with non-
operating income $200 million higher than our forecast generated the $0.02
upside relative to our forecast. Given the extremely downbeat expectations for
Intel's financial performance the third-quarter numbers can only be viewed as a
success.
Decent Q4 outlook
The same might be said of the outlook for the fourth quarter - company
management talked about a 4% to 8% sequential increase in revenue. Intel
generated double-digit sequential revenue growth in 1999 and 1998, so by those
standards the outlook is not good, but it is better than what we believe
expectations were prior to the call. Our checks confirm Intel's own comments -
demand is seeing a modest seasonal improvement. Our own $9.31 billion number
is towards the high end of the 4% to 8% range, but we believe that Intel is
being deliberately conservative. As information flow improves through the
quarter we expect the stock to trade well, which supports our moderately
positive intermediate-term stance.
Margin for next year is a bigger question
However, it is also time to come to terms with the earnings picture for the
next year, which is somewhat less upbeat. Intel's substantially increased
capital spending in 2000 will begin to take depreciation expenses up over the
course of 2001, and we expect additional increases in capital investment during
2001 as Intel invests heavily in moving to 0.13 micron manufacturing. We also
note that the larger P4 microprocessor will begin to ramp in earnest during the
first part of 2001 - lowered die count per wafer and initially lower yields
will play a significant role in lowering product gross margins for Intel's
microprocessor group. We are taking our gross margin estimate for 2001 down,
from 63.2% to 60.9%. We are also moving our revenue estimate down, from $40.8
billion to $39.3 billion, to reflect a more aggressive set of selling price
assumptions for PIII. The result is earnings per share in 2001 of $1.64, down
from our previous estimate of $1.77.
We are cutting our long-term rating from buy to accumulate
With that in mind, it is difficult to continue recommending the stock as a long-
term buy. Intel has done an excellent job of increasing its exposure to non-
microprocessor businesses as quickly as possible, but as this most recent
quarter demonstrated the top line remains heavily geared to PC MPU sales. The
past few quarters have been the best of all possible worlds for Intel in some
ways - the high-yielding, compact PIII Coppermine has ramped, and depreciation
has hardly increased. Intel may not succeed in duplicating those conditions
during 2001. We are reducing our long-term rating from Buy to Accumulate. |
