All,
-READ AT OWN RISKS- (continuation of H&Q report 6/4)
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PRODUCT TRANSITION IS ALSO PLAYING A ROLE
While Intel typically experiences areas of weakness in a particular channel or geography at any point in time, it usually is offset by other areas of strength. In the March quarter, for example, the US retail PC channel was weak yet PC demand in emerging markets was particularly strong. As a result, Intel was able to ship units that were sequentially flat with the December 96 quarter. With Intel;s anticipated revenue decline in Q2, we believe that the inventory correction in Europe is indeed significant, but not the only contributing factor. Intel's recent guidance translates to a revenue shortfall of $300-650 millions sequentially from the March quarter. Given that Intel's sales into Europe totaled 1.8 billion in the March quarter, we find it difficult to believe that the company could experience a revenue decline the magnitude of $650 million in that geography alone. We believe Intel is experiencing overall soft unit demand in classic Pentium processors primarily attributed to the market transition to MMX. We believe that Intel originally forecasted Q2 demand for MMX processors at approximately 7 million units. If true market demand for MMX processors is actually closer to 10 million units, Intel will not be able to turn on the manufacturing pipeline to meet demand quickly enough, causing the company to experience push-outs in subsequent quarters. Although, we are unable to accurately forecast what true MMX market demand is in Q2, we do believe it is greater than Intel's current build.
Q3 GUIDANCE IS EVERYTHING
With management's current guidance of a sequential revenue decline in the range of 5-10%, we are conservatively estimating Intel to earn $1.7 per share in the June quarter. First call consensus for the June quarter is currently $1.89. Taking into account only the most recent earnings revisions, the consensus is droped to $1.81. (using 15 samples). We anticipate that Intel will be able to meet Q2 estimates. However, the more interesting issue relates to Q3. September quarter consensus EPS estimates for Intel is currently $2.03 which is nearly identical to estimates using only the most recent revisions of $2.02. This represents a 12% earnings growth from Q2 to Q3 which clearly indicates that analysts are interpreting Intel weakness as only a short term phenomena. Further, this indicates an expectation that Intel will give strong sequential growth guidance for Q3 on the June quarter conference call. In our opinion, it would be very surprising that Intel would have such clear visibility into Q3 and have the confidence to project strong guidance after pre-announcing lower than expected revenue in the prior quarter. If Intel is currently experiencing an inventory correction in Europe, and Europe PC sales are seasonally soft in September, we cannot reasonably expect much growth in Intel's European microprocessor sales in Q3. In addition, if Intel continues to be overwhelmed with demand for MMX, and capacity mix is estimated to be at only 50% in Q3, we have to assume product transition issues will carry over into Q3. In our opinion, Q3 estimates could be revised 5 to 10% downward after Intel's Q2 conference call, which may put pressure on the stock near term. This would bring consensus to a level that approaches our $1.74 EPS estimate for Q3.
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A honest, down-to-earth analysis. More to come....
Ibexx |
