RESEARCH COMMENT: 20129021
OCT 17, 2001
Osha
Intel Corp Margins bottoming - raising rating ACCUMULATE* Long Term: ACCUMULATE
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Merrill Lynch, as a full-service firm, has or may have business relationships,
including investment banking relationships, with the companies in this report.
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Reason for Report: Earnings Analysis
RC-TOPIC:Highlights:
o Intel reported results for the September quarter that were slightly better
than expected, and also set a margin target for the December quarter that was
better than our forecast.
o We are raising our 2002 earnings estimate from $0.64 to $0.69 - our 2001
estimate still stands at $0.47.
o The move to 0.13 micron and expanding market share should operate in
Intel's favor during 2002. Both factors have historically been positive for
Intel's stock price.
o Our intermediate-term rating is being upgraded, from neutral to
accumulate.
RC-TABLE0168003000
Price: $24.96
12 Month Price Objective: $30
Estimates (Dec) 2000A 2001E 2002E
EPS: $1.65 $0.47 $0.69
P/E: 15.1x 53.1x 35.9x
EPS Change (YoY): -71.5% 47.2%
Consensus EPS: $0.49 $0.63
(First Call: 10-Oct-2001)
Q4 EPS (Dec): $0.38 $0.09
Cash Flow/Share: $1.84 $0.45 $0.68
Price/Cash Flow: 13.6x 55.3x 36.6x
Dividend Rate: $0.02 $0.08 $0.08
Dividend Yield: 0.1% 0.3% 0.3%
Opinion & Financial Data
Investment Opinion: B-3-2-7 to B-2-2-7
Mkt. Value / Shares Outstanding (mn): $172,199.0 / 6,899
Book Value/Share (Sep-2001): $5.22
Price/Book Ratio: 4.8x
ROE 2001E Average: 8.8%
LT Liability % of Capital: 5.6%
Est. 5 Year EPS Growth: 15.0%
Next 5 Year Dividend Growth: 15.0%
Stock Data
52-Week Range: $47.88-$18.96
Symbol / Exchange: INTC / OTC
Options: AMEX
Institutional Ownership-Vickers: 49.6%
Brokers Covering (First Call): 24
For full investment opinion definitions, see footnotes.
RC-T-END:
Looks like a margin bottom - we are upgrading to accumulate
Intel's results for the September quarter were better than our estimates, and
we believe that the bottom in gross margins that we have been waiting for is
occurring now. We are upgrading our intermediate-term opinion from neutral to
accumulate - we think that it is time for investors to begin building a
position in the stock in anticipation of improved margins and growing market
share during 2002.
Q3 was slightly ahead of our estimates
Numbers for the September quarter were slightly better than we expected at both
the top and bottom line. Revenue of $6.545 billion came in ahead of our $6.298
billion estimate, and earnings of $0.10 beat our estimate by a penny. The
result would have jumped to $0.11 had it not been for an impairment charge that
was not incorporated in our model. Gross margin was slightly ahead of our
estimate, while operating costs were lower.
P4 ramp has outstripped our aggressive expectations
The speed with which Intel has ramped P4 is remarkable, and has exceeded even
our aggressive expectations. Our model shows P4 shipments at 12.5 million
units during the third quarter, or 46% of our total estimated unit volume of 27
million units. P3 has ramped down with similar speed. Intel's decision to
focus on recapturing market share with the P4, even at the expense of margin,
appears to have been the right one - the company clearly has picked up share on
AMD during the quarter.
Q4, 2002 estimates up
Our revenue estimate for the fourth quarter is being raised as a result, from
$6.15 billion to $6.66 billion. Our earnings estimate stays at $0.09 as a
result of another unanticipated impairment loss during the quarter, but leaving
that aside our estimate would have moved to $0.11. We are boosting our 2002
earnings estimate from $0.64 to $0.69, although our revenue estimate is largely
unchanged at $29 billion - slightly expanded gross margin and lower operating
cost estimates make up the difference.
P4 ramp will continue, and process transition will start
As we look into the fourth quarter and 2002, we can be fairly sure of two
things. First, Intel will continue to ramp P4. Our new model shows P4 volume
at 79 million units during 2002, up from 32 million units this year. We also
know that Intel will begin to reap the benefits of its massive investment in
process technology as it rolls production over to 0.13 micron manufacturing.
Both of those factors should underpin improved gross margin for Intel during
2002.
Some rocks during Q4, perhaps, but time to begin accumulating on a 12-month
basis
We have been saying for some time that it would be difficult for Intel's gross
margins to improve while the company continued to ramp the P4 on its 0.18
micron process - hence our conservative stance on the stock until now. With a
surprisingly robust Q4 gross margin estimate of 47%, it appears that Intel has
hit bottom, and at a higher level than we had expected.
We do believe that a hiccup in the currently smooth P4 ramp may be in the
cards, which could put some pressure on the stock in the short term. We doubt
that PC sell-through has been good for the last six weeks, while the scramble
to build P4 motherboards has continued unabated. That is a dangerous mix -
disappointing demand during November could easily cause a backup in new P4
orders. However, we think that investors should now be focusing on Intel's
earnings power during 2002 as opposed to near-term demand issues.
Back to 60%+ gross margins? Not likely
It is also important to note that an improvement next year does not necessarily
imply a return to the lofty growth and margins of 2000. Intel had two factors
operating in its favor then that it does not now. First, average selling
prices were underpinned by robust growth for server microprocessors and tight
supply on the desktop side. That will not be the case in 2002, and our model
shows a 10% decline in Intel's overall ASP during 2002 as compared to flat
performance during 2000. Secondly, depreciation will be up by 25% during 2002,
while Intel benefited from flat depreciation during 2000. Margin will expand,
but Intel is not going to see 60% for a long time.
Valuation still high on earnings, better on revenue
Valuation on the stock is not cheap at 36x our forecasts 2002 earnings, versus
a 1998 trough of 19x. On a revenue basis things look better, with the stock at
6x forward revenue compared with a 1998 trough of 5x. However, we note that
our gross margin estimate for 2002 could easily be low - forecasting the number
correctly at this stage of Intel's product cycle is difficult, and 1998
earnings estimates did not actually reflect the full scale of Intel's 1999
improvement either. We also note that the stock has tended to trade with the
direction of gross margin. That should continue to be the case during 2002.
RC-TABLE0177008800
(Panel 1)
Table 1: Intel Historical and Forecast Income Statement
($million/%) Q101 Q201 Q301 Q401E Q102E Q202E
Revenues 6,677 6,334 6,545 6,658 6,753 6,865
Cost of Sales 3,225 3,307 3,553 3,551 3,558 3,547
Gross Profit 3,452 3,027 2,992 3,107 3,195 3,318
Operating Expenses 2,810 2,810 2,603 2,565 2,582 2,625
R&D 995 919 930 1,000 1,013 1,030
SG&A 1,155 1,174 1,064 1,015 979 995
Other Oper Exp 660 717 609 550 590 600
Oper Income 642 217 389 542 613 693
Non-oper Inc (Exp) 264 129 -252 -230 125 150
Pretax Income 906 346 137 312 738 843
Provision for Taxes 421 150 31 221 398 433
Effective Tax Rate 46% 43% 23% 71% 54% 51%
Net Income 485 196 106 90 340 410
Net Income ex one-offs, goodwill 1,099 854 655 640 987 1,072
Diluted EPS 0.07 0.03 0.02 0.01 0.05 0.06
Diluted EPS ex one-offs, goodwill 0.16 0.12 0.10 0.09 0.14 0.15
Diluted EPS - # Shares 6,899 6,889 6,876 6,880 6,930 6,980
% of Revenues
Cost of Sales 48.3% 52.2% 54.3% 53.3% 52.7% 51.7%
Gross Profit 51.7% 47.8% 45.7% 46.7% 47.3% 48.3%
Operating Expenses 42.1% 44.4% 39.8% 38.5% 38.2% 38.2%
R&D 14.9% 14.5% 14.2% 15.0% 15.0% 15.0%
SG&A 17.3% 18.5% 16.3% 15.2% 14.5% 14.5%
Other Oper Exp
Oper Income 9.6% 3.4% 5.9% 8.1% 9.1% 10.1%
Non-oper Inc (Exp) 4.0% 2.0% -3.9% -3.5% 1.9% 2.2%
Pretax Income 13.6% 5.5% 2.1% 4.7% 10.9% 12.3%
Net Income 7.3% 3.1% 1.6% 1.4% 5.0% 6.0%
% Change YoY
Revenues -16.5% -23.7% -25.0% -23.5% 1.1% 8.4%
Gross Profit -31.0% -39.7% -46.4% -43.2% -7.4% 9.6%
Operating Income -74.9% -91.0% -86.4% -79.0% -4.5% 219.2%
Pretax Income -71.6% -92.7% -96.4% -90.8% -18.5% 143.6%
Net Income -82.0% -93.8% -95.8% -95.9% -30.0% 109.1%
(Panel 2)
Table 1: Intel Historical and Forecast Income Statement
($million/%) Q302E Q402E FY00 FY01E FY02E
Revenues 7,395 7,990 33,726 26,214 29,003
Cost of Sales 3,585 3,796 12,650 13,636 14,485
Gross Profit 3,810 4,194 21,076 12,578 14,517
Operating Expenses 2,792 3,017 10,681 10,788 11,016
R&D 1,109 1,199 3,897 3,844 4,350
SG&A 1,072 1,199 5,089 4,408 4,245
Other Oper Exp 610 620 1,695 2,536 2,420
Oper Income 1,019 1,177 10,395 1,790 3,502
Non-oper Inc (Exp) 175 180 4,746 -89 630
Pretax Income 1,194 1,357 15,141 1,701 4,131
Provision for Taxes 541 593 4,606 823 1,965
Effective Tax Rate 45% 44% 30.4% 48.4% 47.6%
Net Income 652 764 10,535 877 2,166
Net Income ex one-offs, goodwill 1,340 1,469 11,527 3,248 4,868
Diluted EPS 0.09 0.11 1.51 0.13 0.31
Diluted EPS ex one-offs, goodwill 0.19 0.21 1.65 0.47 0.69
Diluted EPS - # Shares 7,030 7,080 6,986 6,886 7,005
% of Revenues
Cost of Sales 48.5% 47.5% 37.5% 52.0% 49.9%
Gross Profit 51.5% 52.5% 62.5% 48.0% 50.1%
Operating Expenses 37.7% 37.8% 31.7% 41.2% 38.0%
R&D 15.0% 15.0% 11.6% 14.7% 15.0%
SG&A 14.5% 15.0% 15.1% 16.8% 14.6%
Other Oper Exp
Oper Income 13.8% 14.7% 30.8% 6.8% 12.1%
Non-oper Inc (Exp) 2.4% 2.3% 14.1% -0.3% 2.2%
Pretax Income 16.1% 17.0% 44.9% 6.5% 14.2%
Net Income 8.8% 9.6% 31.2% 3.3% 7.5%
% Change YoY
Revenues 13.0% 20.0% 14.8% -22.3% 10.6%
Gross Profit 27.3% 35.0% 20.4% -40.3% 15.4%
Operating Income 161.8% 117.4% 6.4% -82.8% 95.7%
Pretax Income 771.2% 335.5% 34.9% -88.8% 142.9%
Net Income 515.5% 747.2% 44.0% -91.7% 146.9%
Source: Company Information, Merrill Lynch Estimates
RC-T-END: |
