That is the funniest buy on Intel I have ever seen yet that is:
"We would be a better buyers of INTC around the $24-27 level or the channel
inventory clears in 2Q01. Maintain Buy rating."
Regards
-Albert
06:37am EST 25-Jan-01 Credit Suisse First Boston (Glavin, Charles (415) 836-77
INTC: Pushing Itself Down the Slippery Slope with Aggressive Price Cuts FBC
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Technology/Semiconductors
Charlie Glavin, CFA 1-415-836-7715 charlie.glavin@csfb.com
Caroline Moon 1-415-836-6321 caroline.moon@csfb.com
BUY
LARGE CAP
USD 36.25
Intel Corporation (INTC)
INTC: Pushing Itself Down the Slippery Slope With Aggressive Price Cuts
Summary
We expect Intel's regularly scheduled price cuts next Monday will be fairly
aggressive-20-40%-across the board for Celeron, P3, P4, mobile and even Xeon
processors.
With no new processor family or killer software on the horizon, INTC's only
lever right now to burn off the channel glut and motivate end-customer is
pricing. As we wrote about back on 12/2/00, Intel is on a slippery slope of
price pressure since it lost its bargaining leverage with OEMs in 4Q and won't
regain it until Labor Day. In addition, AMD and Intel are engaged in a price
war - no matter how much they deny it.
Intel has also had to ramp its Pentium-4 early on a cost ineffective 0.18-micron
process (large die size), since the P3 ran out of gas at the 1.1-GHz level.
Next week's price cuts are a way of migrating that demand, but all of these
issues put additional margin pressure on Intel.
We would be a better buyers of INTC around the $24-27 level or the channel
inventory clears in 2Q01. Maintain Buy rating.
Price Target Mkt.Value 52-Week
01/24/011 (12mo.) Div. Yield (MM) Price Range
USD 36.25 40 None $254,003.8 76-29
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
12/01E $1.00 36.3X 159%
12/00E 1.63 22.2 93%
12/99A 1.16 31.3 117%
March June Sept. Dec. FY End
12/01E $0.23 $0.23 $0.26 $0.29 Dec.
12/00E 0.35 0.49 0.41 0.37
12/99A 0.29 0.25 0.27 0.35
ROIC (12/9)
Total Debt (12/00) $1,085
Book Value/Share (12/00) $5.33
WACC (12/98)
Debt/Total Capital 12/00) 2.8%
Common Shares 7,007
EP Trend2
Est. 5-Yr EPS Growth 25%
Est. 5-Yr. Div. Growth 29%
1On 01/24/01 DJIA closed at 10,647.0 and S&P 500 at 1364.3.
Intel is the world's largest semiconductor company and the largest supplier of
microprocessors (CPUs) with an estimated 80% unit share of the PC processor
market. The company is also the largest supplier of Flash memory and PC
chipsets and a leading supplier of low-end networking solutions.
Investment Summary
With Intel's scheduled price cuts anticipated this weekend, we expect to see
fairly aggressive reductions across the board for Celeron, P3, and P4
processors-for both desktop and mobile processors. We believe there are
several reasons for such sharp cuts:
To help flush excess channel inventory;
To motivate end-user purchases (in absence of new CPUs and software as drivers);
To migrate Pentium-3 demand to the Pentium-4;
To increase more laptop sales; and
To react to/initiate competitive pricing with AMD.
Cuts of 20-40% Across the Board
These price cuts, while expected as far as timing, are likely to be considerable
in their magnitude-in the 20-40% range depending on the product-as PC
environment remains weak and visibility continues to be poor (about one month's
worth). Surprisingly, Intel appears to be ready to not only cut mobile
processors by 30%, but will also cut its Xeon chips by 15-20% (probably due to
slowing multi-processor server sales).
Cuts below the $300 dollar level are generally a signal for high volume
manufacturing for desktops. Based on industry contacts, we believe Intel will
reduce the price of its 1.5GHZ Pentium 4 chip by 21% to $644 and its 1.4GHz
Pentium 4 by 23%, to $440. Even though INTC doesn't advertise its 1.3GHz P4
(it's a down-bin of the 1.4Ghz), that processor looks to be cut 40% to $290.
The price of the 1GHz Pentium III should be reduced 42% to $268 while the 933MHz
P3 will get cut 33% to $240.
Celeron price cuts appear to range from a 20% cut on the 733Mhz (to $93) to a
34% haircut on 766MHz to $112.
Mobile cuts are all around 30-33%-the 850MHz to $508, the 800MHz from $508 to
$342, and the 750-MHz to $268. Mobile Celerons have similar 30% cuts to the
$125 to $75 range (for 700MHz and 600MHz versions respectively)
Pricing Intel's Only Real Lever Right Now to Move Demand
During current market conditions, Intel's only means of leverage to stimulate
demand and to speed up the inventory absorption is to cut prices
We also expect that Intel's price cuts will include its mobile processors, but
will not be severe enough to remove the historical ASP premium versus desktop
equivalent speeds. Migrating a greater mix of desktop demand to the higher
margin mobile processors would definitely help Intel's sagging gross margins.
The desktop processor market appears to have slowed to the point that it will
probably have flat revenue growth this year. Meanwhile the laptop market may
have slowed from its 2000 growth of 40%, to a forecasted growth rate of 20-25%
for 2001, and therefore Intel needs to sell more units in that market. Lowering
the price and removing the desktop discount is a key means of accomplishing
that goal.
We also believe that no matter how much AMD and Intel deny it, they are engaged
in a price war for market share. As we wrote about on 11/29/00, we estimate
that PC systems built around Intel's new 815EP chipset have a $25-30 bill of
material savings over an AMD Duron alternative; however, since the integrated
graphics is only disabled (and not removed) on the 815EP, it will carry a higher
cost versus a non-integrated solution. The 815EP-which seems to has been very
well received in China-was designed to meet OEM and white-box manufacturers'
needs, and appears to have placed INTC a step ahead of AMD.
Historically, Intel's superior product offerings and its brand name were enough
to justify price premiums with OEMs, given AMD's reliably poor execution in the
past. However, AMD's recent step up in the performance (and yields) game, along
with the growing number of supporting chipsets and motherboards (indicating the
industry's increasing acceptance of AMD's products) have now put Intel and AMD
essentially neck-and-neck in the processor performance arena, diminishing
Intel's traditional leverage.
Continue To Advocate Staying on Sidelines during 1H01
The bad news continues to be that the PC environment has not improved, and
visibility still remains quite poor; we do not expect improvement through 1H01.
As a result, we expect pricing pressure to continue between Intel and AMD
through Labor Day, as weak end demand and inventory overhang continue to push
both companies down the slippery slope of pricing. What's more, while in the
past Intel could engage in price wars while only suffering minimal impact to
margins, its difficult transition to the 0.18 micron process and aggressive plan
to move to 0.13 micron has put significant pressures on Intel's margins, thus
reducing the company's wiggle room. The Pentium-4 on a 0.18-micron process is a
very large chip, and as a result more costly than if Intel could have built
higher speed Pentium-3 chips on the same 0.18-micron process. As we've written
about, due to a combination of manufacturing issues (etch, mask-set, and
deposition), the Pentium-3 designs for the 0.18-micron process were effectively
killed at the 1.1Ghz level. A new 0.13-micron based Pentium-3 isn't slated to
be unveiled until next October.
We continue to believe that while Intel's long-term prospects may still be
intact we remain very concerned about near-term visibility and the lack of
conviction as to why the market will rebound in 2H01. We maintain our Buy
rating, but would not be aggressive buyers of the stock until the $24-27 level.
N.B.: CREDIT SUISSE FIRST BOSTON CORPORATION may have, within the last three
years, served as a manager or co-manager of a public offering of securities for
or makes a primary market in issues of any or all of the companies mentioned.
Companies mentioned:
Intel
AMD |
