Elwood, here is the Lehman/Niles report. Warning, strong stomach required before reading <ggg>.
Regards,
John
Lehman expects intel's 2000/2001 growth to be -21%, ouch
07:53am EST 3-Jan-01 Lehman Brothers (Niles, Daniel 415-274-5252) INTC AMD AAP
Intel Corp: PC Demand & Pricing Tougher Than Expected-Cutting EPS P1 of 2
Today`s Date: 01/03/01
Ticker: INTC Fiscal Year: 12/31
Price: 31.0625 52wk Range: 76 - 30
Rank(New): 2 - Outperform Target(New): 40
Rank(Old): 2 - Outperform Target(Old): 55
-----------------------------------------------------------------------------
EPS 1999 2000 2001 %Change
Act. Old New St.Est Old New St.Est 2000/2001
1Q 0.29 0.35A 0.35A 0.36A 0.34E 0.33E 0.35E 21 -6
2Q 0.26 0.50A 0.50A 0.50A 0.34E 0.32E 0.36E 92 -36
3Q 0.27 0.41A 0.41A 0.41A 0.36E 0.33E 0.39E 52 -20
4Q 0.34 0.38E 0.38E 0.38E 0.36E 0.32E 0.42E 12 -16
-----------------------------------------------------------------------------
Yr. 1.16 1.64E 1.64E 1.65E 1.40E 1.30E 1.53E 41 -21
P/E 18.9 23.9
-----------------------------------------------------------------------------
MARKET DATA FINANCIAL SUMMARY
Shares OutStanding (MM) 7,005.0 Revenue (B) 33.7
Mkt Capitalization (B) 217.6 Five-Year EPS CAGR 25.0 %
Dividend Yield - - Return On Equity (2000) - -
Convertible No Current Book Value - -
Float - - Debt To Capital - - %
Disclosure(s) C
-----------------------------------------------------------------------------
INVESTMENT CONCLUSION
* We believe that both unit demand and pricing exiting Q4 was more difficult
than even pre-announced expectations for the PC industry. In addition, as
the Fortune 500 finalize IT budgets for 2001, we believe growth will be
3-5% below the current 10% forecast. As a result of this and increasing
PC channel inventory, we are lowering our EPS for Intel for CY01 from $1.40
to $1.30 and for Dell from $1.10 to $1.00.
SUMMARY
* We believe that 2001 will add the issues of stretching IT budgets for the
Fortune 500 and weakness from Asia. This will add to the weakness in
consumer and in Europe & North America that we saw in 2000.
* It seems as though more aggressive pricing is not spurring much of an
increase in demand resulting in a trade-off between profitability and
revenue growth.
* Though we believe downside in the PC sector is less than our comm sector for
those who must own some technology, we believe the stocks will still decline
further for those who dont need to own any.
-----------------------------------------------------------------------------
We believe that PC demand in the last two weeks of December was terrible
leading to lower expectations for 2001. Intel in early December revised Q4
revenue guidance down from 4-8% q/q growth to flat q/q plus or minus a couple
of percent but did not give guidance for Q1 or CY01 due to lack of
visibility. We now believe that given the trends in late December that Intel
will have to lower Street expectations for both Q1 and CY01. We are lowering
our Q1 EPS from $0.34 to $0.33 and CY01 from $1.40 to $1.30 versus First Call
consensus of $0.35 and $1.53 respectively. We believe that Dell estimates
will also head lower and are reducing our Q4 (Jan) EPS estimate from $0.26 to
$0.25 and CY01 from $1.10 to $1.00 versus First Call consensus of $0.26 and
$1.10, respectively.
The weakness in processors seems to have spread to servers, which are also
now showing signs of weakening as the corporate market starts to soften. We
believe that since Intels pre-announcement in early December that consumer and
commercial demand has continued to get worse with commercial showing the most
disturbing trends. In addition, we believe that servers, which actually had
been track for part of the quarter, saw some softening which we believe is
related to corporate IT budget stretch outs flowing back through to the PC
vendors. We believe that this is not just a dot.com or small/medium business
phenomena but that the spending slowdown is also related to Fortune500
companies which are adjusting to their lower growth forecasts by lowering
their spending growth rates.
We now believe that global IT spending which was expected to grow
approximately 10% in 2001 from about $950B last year is now likely to see
growth closer to 5-7%. According to IDC, hardware and IT services are about
40% of the $950B total global IT market with software about 20%. Given the
large percentage that hardware is of the IT budget, we believe that many
companies will stretch the IT budget by upgrading the hardware (i.e. adding
more memory or a larger disk drive) or upgrading the software versus buying
entirely new hardware.
Manufacturing and banking/financial industries together comprise almost 40% of
total IT spending dollars and neither sector is looking promising for 2001.
The manufacturing sector is roughly $210B, or about 22% of total global IT
spending. This sector is obviously seeing some signs of slowing growth as
was seen yesterday by the NAPM index which slipped to 43.7 from 47.7 in
November, hitting the lowest level since April 1991 when the country was
emerging from a recession. A leading indicator, the new orders index fell
sharply in December to 42.0 from 48.4 in November. IT spending in the
banking/financial industry is also about $160B or about 17% of total global IT
dollars. Obviously, with both the financial markets and the credit markets
likely to make 2001 a much more challenging year than 2000 for corporate
profits, as evidenced by the pre-announced results of Bank of America and
Chase, IT spending in this sector is likely to come under pressure.
We believe that IT spending growth will mirror US GDP growth, which was about
5% last year but is likely to be closer to the 2-3% range this year assuming a
more optimistic scenario. We also note that of the $950B spent on IT in
2000, approximately $440B or just over 45% of the total was spent by North
American companies. We note IDC estimates that growth in IT spending in North
America will be about 8% in 2000 with a 9% compounded growth forecast for the
following three years. This seems very optimistic to us given that IT spending
growth in the past has been closely coupled to GDP growth.
We believe that unsold inventory of PCs and components entering 2001 combined
with weakening demand is likely to lead to a more aggressive pricing
environment. We have heard several sources confirm that price cuts are not
having the desired effect on volume growth and that the market does not
currently seem very elastic in either the corporate of consumer sector. As a
result, we believe 2001 will lead to a trade-off between volume growth and
profitability, as we saw in 1998 for the PC industry. This combined with PC
channel inventory levels which we believe have surpassed 10 weeks for several
of the top vendors is likely to create a horrible environment in 1H:01 for the
PC industry as well as their component suppliers. As a result, we expect that
PC price points are likely to decline in the high single digits next year with
processor prices following a similar trend as well.
We now believe that PC unit growth in the low double digits and revenue growth
in the low to mid single digits is probably the correct assumption for 2001.
Our prior thinking had been mid-teens with mid-to-high-single digit revenue
growth. If the US economy snaps back following the anticipated federal
reserve cuts or Europe stages a recovery, this could prove to be conservative.
However, right now that does not seem very likely to us.
We believe gross margins, which appear to be stable in Q4, will trend
significantly lower in 2001 as profits are traded for volume growth for both
Intel For Intel the P4 die size is twice that of the PIII and Intel will not
achieve true manufacturing efficiencies on this product until it ramps on
0.13-micron, which is not scheduled to begin until Q4 2001. Moreover, margins
will be under further pressure from the $70 Rambus subsidy that Intel must
pay for each P4 processor sold until DDR support for P4 ramps in late Q2:01.
The processor environment will probably continue to be very challenging as
AMD starts to penetrate the corporate market for PCs. We note that yesterday
Micron Electronics announced their intent to offer a business line of Athlon
based PCs. Many PC makers offer AMD consumer lines, but Micron Electronics
is the first well-known North American manufacturer to offer the Athlon on
desktops for the corporate market. If this line sells well, Intel may see
other vendors following suit. We believe that gross margins will now dip
below 60% for 2001 versus 62.5% for 2000 for Intel.
and Dell. We believe that given Dells dependence on the corporate market for
their revenue growth and on the Americas and Europe on a geographic basis
that they have no choice but to engage in much more aggressive pricing
tactics to generate volume. We believe that the inventory of PCs building in
the channel by their competitors makes this an even more difficult time for
them. Our EPS reduction are based on revenue growth of 17% versus our former
20% for 2001 but also on lower gross margins of 20.1% versus our former 20.9%.
We note that we have not made any changes to the investment gain estimates
which add another $0.04-$0.05 for the year. This will probably have to be
lowered by 1-2 cents as well at some point in the future.
Trailing 12 month analysis of price to sales and price to earnings multiples
indicates there is still room for multiple compression, but that the sector as
a whole probably has less downside than other areas of technology like
communications. Dell is currently trading at 21.3x P/E versus a historic low
of 10.3 (a 107% premium from the low) and at a 1.5x P/S versus a historic low
of 0.4 (a 275% premium). Intel is currently trading at 18.8x P/E versus a
historic low of 14.0x (34% premium) and at a 6.1x P/S versus a historic low
of 2.7x (126% premium). We believe there is still room for multiple
compression when compared to other names that we cover such as Gateway which
is trading at a P/E low of 10.8x and Compaq which is trading at a P/S low of
0.6x. However, we believe the PC sector as a whole is likely to see less
downside than other areas of technology such as the communications IC sector
where valuations could still decline much more significantly.
LTM Price to Earnings Multiples (Last 5 Years)
Intel AMD Dell CPQ GTW
Current 18.8 6.8 21.3 18.1 10.8
High 56.9 NM 105.3 100.6 56.8
Low 14.0 5.5 10.3 10.3 10.8
Median 24.5 9.5 49.6 25.8 26.2
Source: Baseline
LTM Price to Sales Multiples (Last 5 Years)
Intel AMD Dell CPQ GTW
Current 6.1 1.0 1.5 0.6 0.6 |
