hey Intel is downgraded by CSFB
intel can not go into mass production of .13
07:28am EST 13-Feb-01 Credit Suisse First Boston (Glavin, Charles (415) 836-77
INTC: Visibility Steadily Worsens; Downgrading to Hold - Pt1 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
HOLD
LARGE CAP
USD 34.56
Intel Corporation (INTC)
Visibility Steadily Worsens; Downgrading to Hold
Summary
We are downgrading Intel to a Hold from a Buy, as we believe a substantial
recovery for 2001 is unlikely for Intel. End demand and visibility continue
to deteriorate while operating margins decline.
Margins should be at risk due to a higher mix of P4 (2x cost vs. P3), large
capex plans ($7.5B) in 2H01,and the continuing AMD/Intel price war. With
Intel expected to launch a 1.7-Ghz P4 in May, the pricing situation should
get worse. Despite guidance for 58% margins, we would not be surprised to
see margins in the 50-55% range by 2H01.
Intel also lacks a clear catalyst for a 2H01 recovery, except for a "return
to normal patterns." However, with global desktop revenue expected to
decline 17% in 2001 and down 15% in 2002, a slow down in laptops (10-15%
growth) and servers (11%) makes a bad situation worse.
Our 2001 EPS estimate is now $0.92 on revs of $31B; our 12-month price target
is $33, owing to our EPS revisions. We would sit on the sidelines with any PC
-components stock, as demand remains anemic and visibility is near zero
regarding a rebound.
Price Target Mkt.Value 52-Week
02/12/011 (12mo.) Div. Yield (MM) Price Range
USD 34.56 33 None $242,161.9 76-29
Annual Prev. Abs. Rel. EV/
EPS EPS P/E P/E EBITDA
12/01E $0.92 $1.00 37.6X 168%
12/00A 1.63 21.2 91%
12/99A 1.16 29.8 114%
March June Sept. Dec. FY End
12/01E $0.21 $0.21 $0.23 $0.26 Dec.
12/00A 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 10%
Est. 5-Yr. Div. Growth 29%
1On 2/12/01 DJIA closed at 10,946.8 and S&P 500 at 1330.3.
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
We are downgrading Intel to a Hold from a Buy, as we believe that a
substantial recovery in growth for 2001 is unlikely for Intel. A combination
of weaker than expected end-markets and company specific issues (P4 ramp and
pricing) have forced us re-examine our investment stance on the company.
Weaker End Markets in Desktop, Servers, and Laptops
Due to weak desktops and a lack of strength from servers/laptops to counter
that weakness, we now expect microprocessor sales to decline 5-10% in 2001.
Nearly 50% of Intel's revenue still comes from components sold to desktops.
However, with the exception of some rebound in Europe and low-end sales to
China, sales continue to disappoint. CSFB's PC analyst Kevin McCarthy
recently noted that overall desktop revenue is now expected to decline 17% in
2001 and another 15% in 2002. Currently, the U.S. PC channel inventory is at
8 weeks from the normal 4-6 weeks since Christmas. This is consistent with
the SIA/inventory study we published last week (see First Call, 2/5/01).
Meanwhile, laptop growth is only expected to be 10-15% this year (roughly 20%
of Intel revenue) while server growth is only expected to be 11%, according
to CSFB analyst Amit Chopra-versus our previous expectation for 25%+.
Meanwhile, the recent strength in Flash also appears to be weakening and
cannot hide the processor weakness as it did in 3Q00 and 4Q00.
Price Wars Continue as Intel Preps for 1.7-Ghz P4 in May
Furthermore, aggressive price wars in order to gain market share continue
between AMD and INTC-as much as they may deny there is one-since their only
means of leverage to stimulate demand and to speed up the inventory
absorption in the current market condition is to cut prices. 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.
According to our contacts, INTC plans to further reduce its prices (25-35%)
between now and May when Intel is expected to launch a 1.7-GHz P4-since 1.4-
GHz just wasn't enough. Most of the cuts will be on its P4 and lower-speed (1
.1-GHz or less) P3 chips, while only modestly reducing prices on faster P3s
that are comparable performance options to P4s, in order to drive faster
adoption of the P4 family.
P4 Ramp in 2001: Heads They Lose, Tails They Lose
Unfortunately, a quicker ramp of the P4, while still on a 0.18-micron process
, is not necessarily a good thing. As a point of reference, the current P4
die size in 217 sq. mm, whereas the P3 is 104 sq. mm - this means that on a
comparable wafer, the P4 will yield less than half as many die; or put
another way, the P4 should cost 130% more than the P3. Not since Intel
started ramping the SEC based Pentium-2 (Deschutes) has the company had to
address declining margins as its new processor ramps. Consequently, we would
not be surprised to hear Intel's CFO Andy Bryant again emphasis the growth in
"gross margin dollars" instead of declining gross margins percentage (just as he
did back in 1998).
To make matters worse, we believe the ramp of the Pentium-4 is not going as
well as expected. Yields of the P4 appear to be in the 35-40% range, while
the P3 continues to average around 75-80%. Thus, simply saying that "all is
well, just wait for 0.13 micron/300mm" is not going to cut it, as volume
production on 0.13 micron is not something that is going to happen in earnest
anytime in the next 12 months-more likely 0.13 micron is an early 2002 story.
$7.5B Capex? History, Markets, and Economics at Odds
When looking at Intel's projected $7.5B capex forecast for 2001, history says
they won't, the market says they shouldn't, but economics say they must.
During the last downturns of 1996 and 1998, while INTC planned to spend $4.1B
and $5.3B, respectively, actual investments fell short by 23% and 33%,
respectively, from forecasted amounts. This could imply that while INTC has
publicly stated it plans to spend $7.5B in capex-likely in an effort to act
as if all was indeed well-there is a good possibility that capex deployment
will play out differently over the course of 2001.
Exhibit 1
Planned Vs. Actual Capex 1995-2000
$ in Billions 1995 1996 1997 1998 1999 2000
Expected capex 2.9 4.1 4.5 5.3 3.0 5.0
Actual capex 3.6 3.2 4.5 3.6 3.4 6.7
Differential 0.7 -0.9 0.0 -1.7 0.4 1.7
% Differential 24.1% -22.5%0.0%-32.9%13.3%34.0%
Source: Company reports.
We believe that by mid-year, Intel will hedge on its original projections and
state that capex programs are not constrained to "calendar years." Since
Intel periodically reviews capex depending on market conditions, we believe
that Intel was being truthful when it said that it didn't need the $7.5 capex
for an expected rebound in 2H01, but that weaker market conditions means more
of the capex will be spent in 2002. It is important to note that last year,
Intel spent 34% of its capex during 4Q, and nearly 60% of its annual capex
during 2H00 - a period when PC demand sharply decelerated. As a result, we
believe that despite some late 4Q00 equipment deliveries, Intel is currently
paying a 14% penalty NOT to accept equipment in this quarter-not an
encouraging sign, and at the least, requiring an even more back-end weighted
spending for capex in 2001.
Added to this is that if Intel does spend $7.5B in capex for 2001, a 12% Y/Y
increase, while revenues stay flat (at best), the added depreciation should
add further margin pressure.
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
Analyst: Glavin, C Telephone: (415) 836-7715 charlie.glavin@csfb.com
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
Copyright © CREDIT SUISSE FIRST BOSTON, and its subsidiaries and affiliates,
2001. All rights reserved.
CSFB may, to the extent permitted by law, participate or invest in financing
transactions with the issuer(s) of the securities referred to in this report,
perform services for or solicit business from such issuers, and/or have a
position or effect transactions in the securities or options thereon. In
addition, it may make markets in the securities mentioned in the material
presented in this report. PLEASE REFER TO TICKER CSFBDISC FOR IMPORTANT LEGAL
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07:29am EST 13-Feb-01 Credit Suisse First Boston (Glavin, Charles (415) 836-77
INTC: Visibility Steadily Worsens; Downgrading to Hold - Pt2 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
HOLD
LARGE CAP
USD 34.56
Intel Corporation (INTC)
Visibility Steadily Worsens; Downgrading to Hold
So Why Don't They Just Wait and Spend the Capex Later?
This is another question, we've been asked. Basically, it's twofold:
Intel needs the 0.13-micron process for the P4. As far as the fab people in
Oregon, New Mexico, and Ireland are concerned (where the new 300mm fabs will
be), the 0.13-micron process and 300mm are the same. Unfortunately, 300mm
wafer development will take another 9-12 months-so Intel may have the
equipment, but not the raw materials to go into volume production on 300mm.
The last time Intel severely under-spent happened to also be the last time
AMD achieved its 30% market share goal. Essentially, Intel was one fab short
and AMD capitalized on the constraint. We believe CEO Craig Barrett is
making sure Intel isn't short on capacity or advanced line width this time.
One other side effect, perhaps, is that we believe AMD is looking for a
partner to co-invest in its next fab (maybe Motorola?), and with Intel
spending so aggressively, it could make potential suitors nervous.
In short, in the phrasing of the movie "City Slickers," this is a "do-over"
for Intel. Intel has no choice but to bite the bullet, and accept that not
only was 2000 not a great year, but its entire 0.18-micron process was a bust
- deposition, metal etch, and internal mask fabrication problems coupled with
RDRAM delays, the MTH write-off, and chipset delays. Intel needs to pick
itself back up and aggressively move to 0.13 micron. However, we believe
this transition will not be an easy one-no transition is, but given the labor
pains we saw INTC deal with its in its migration to 0.18 micron, we remain
cautious regarding the chances for seamless execution. As well, nobody has
really manufactured in volume on 0.13 micron, and therefore it remains an
unproven technology-yet another reason why we're concerned.
Overall, we would expect these difficulties to continue until at least early
2002. Therefore, we expect persistent margin pressures throughout all of 2001
, and for part of 2002, as INTC continues to manufacture its P4 family on 0.
18 micron (because it has no choice) and transitions over to 0.13 micron.
Operational Excellence?
However, INTC's problems don't just end there, apparently. According to an
article in EE times, INTC withdrew its Itanium (McKinley) papers from the
International Solid-State Circuits Conference (ISSCC), indicating that it
wasn't ready to make a full disclosure as the ISSCC requires presenters to
provide in-depth detail about design. While sampling of the Merced version
of Itanium began at the end of 2000, we are concerned that INTC may have
withdrawn from the ISSCC due to flaws in Itanium's design. If this were to
be the case, then it is likely that Itanium systems-which are slated to go
into production by 2002-will get pushed out as design kinks are worked out.
A pushout in Itanium-while not a large revenue contributor even in 2002-is a
blow to Intel's high-end market plans.
A Return to Growth...Anyone? Anyone?
We basically find ourselves trying to find the silver lining in the storm
clouds. Everyone seems to be waiting-or hoping-for a "return to normal growth
." However, even with Alan Greenspan's intervention, there have been no
appreciable signs to date that anything is improving; if anything, it's
getting worse. The reality continues to be that the PC environment has not
improved, and visibility still remains quite poor; we do not expect
improvement through 1H01. There were some pockets of slight strength that
included low-end sales into Asia before the Asian New Year (which has now
actually disappeared with the passing of the holiday) and laptop sales into
Europe.
For the majority of the market, we expect pricing pressure to continue
between Intel and AMD through at least Labor Day, as weak end demand and
inventory overhang continue to push both companies down in pricing.
Downgrading to Hold; Standing on Sidelines
We continue to believe that while Intel's long-term prospects may be intact,
we remain very concerned about near-term visibility and the lack of
conviction as to why the market will rebound in 2H01. OEMs and Asian
suppliers continue to say they have only a month of visibility at this time (
at best), and we do not expect this to improve any time over at least the next 6
months.
As a result, we are revising our estimates. We are now expecting 1Q01 EPS of
$0.21 (was $0.23) on revenues of $7.2B (was $7.4B) - a 17% sequential decline
. 2001 EPS is now $0.92 (was $1.00) on revenues of $31.1B (was $32.1B
Exhibit 2
Revised vs. Previous Intel Estimates
EPS 1Q2001E 2001E Revenues ($B) 1Q2001E 2001E
Old $0.23 $1.00 Old $7.4 $32.1
New $0.21 $0.92 New $7.2 $31.1
Source: CSFB estimates.
Our new 12-month price target is now $33, which is 7.4x on 2001 revenues-in
line with the median revenue multiple from 1998-present. However, on a P/E
basis, Intel is currently trading at a 38x our 2001 earnings (33x consensus
estimates), double the median P/E multiple since 1998 (15x) and twice its
average since 1985 (20x during that time).
Thus, we find the argument that Intel is cheap hard to swallow for three
reasons:
There is no certainty that PCs will recover in 2001, let alone lead the
industry out of this downturn.
Intel is already trading at twice its historical multiple.
There is more downside risk to INTC's earnings.
We therefore downgrade our rating to a Hold rating from a Buy, and we
recommend investors sit on the sidelines with any PC-component stocks until
visibility and demand rebound, and valuations return to realistic levels.
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 Corp
AMD |
