Lehman upgraded Intel
10:40am EST 30-Nov-01 Lehman Brothers (Niles, Daniel 415-274-5252) INTC AMD DEL
Intel Corp: Raising Q4 Earnings to High-End of Range (part 1 of 2)
PRICE: (USD 32.32)
EPS (FY Dec)
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2000 2001 2002 % Change
Actual Old New St. Est. Old New St. Est. 2001 2002
1Q 0.36 0.16A 0.16A 0.10E 0.13E
2Q 0.50 0.12A 0.12A 0.12E 0.13E
3Q 0.41 0.10A 0.10A 0.14E 0.16E
4Q 0.38 0.08E 0.10E 0.19E 0.20E
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Year 1.65A 0.47E 0.49E 0.55E 0.62E
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P/E
Market Data Financial Summary
Market Cap Revenue FY01
Shares Outstanding (m) Five-Year EPS CAGR
Float Return on Equity
Dividend Yield Current BVPS
Convertible Debt To Capital
52 wk Range Disclosure(s) A,C
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Rating Target
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New: 3 - Market Perform New: 0.00
3 - Market Perform Old: 0.00
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INVESTMENT CONCLUSION :
* Following up on our note on 11/21, we are formally increasing our Q4 EPS
from $0.08 to $0.10 and revs from $6.6B to $6.8B. For FY02, we are
increasing EPS from $0.55 to $0.62 based almost solely on ASPs.
SUMMARY :
* We believe INTC will raise its Q4 revs guidance to the high-end of their
prior range of $6.2-$6.8B and increase the GM forecast to 48% from 47%. While
our unit assumptions have not changed, we have assumed a slight increase in
ASPs going forward with 75% of incremental revenues reaching GP. PIVs are
tight with pricing firm driven by 1) units increasing by 2x vs Q3 as
predicted, 2) a growing gap vs AMD, and 3) the unforseen bottleneck in
functional test restricting output. Given the high valuation and Q1
seasonality, we recommend selling into 12/6 update.
Following up on our note on 11/21, we are formally increasing our Q4 revs
from $6.6B to $6.8B. We note that Intel's current guidance for revenue in the
fourth quarter of 2001 is between $6.2B and $6.8B. As we stated on 11/21, we
believe Intel will guide to the higher end of this range. We believe there
is a possibility of increasing the upper end of the range but given a third
of revenues still have to be done in December, this is not a foregone
conclusion.
.increasing gross margins from 47% to 48% driven by higher revenues and
flattish ASPs. Gross margin percentage in the fourth quarter of 2001 was
forecast to be 47 percent, plus or minus a couple of points, versus 46
percent in the third quarter. Gross margin percentage varies primarily with
revenue levels, product mix, product pricing, changes in unit costs, capacity
utilization, and the timing of factory ramps and associated costs. In this
case, we believe that given revenues are $300M higher than the midpoint of
the range driven by flattish ASPs and 75% of the incremental revenues are
likely to fall through to gross profits. As a result, gross margin should be
about 48% versus the prior forecast of 47%.
.while maintaining prior expense assumptions. Expenses (R&D, excluding in-
process R&D, plus MG&A) in the fourth quarter of 2001 were expected to be
between $2.0B and $2.1B, versus $2.0B in the third quarter. We believe that
given Intel's tight control on expenses, that this is still the right range.
R&D spending, excluding in-process R&D, should remain at prior guidance of
approximately $3.9B in 2001, primarily due to reductions in discretionary
spending within ongoing programs.
.resulting in EPS for Q4 increasing from $0.08 to $0.10 and CY02 increasing
from $0.55 to $0.62. Though our unit assumptions do not change of 5%
processor growth for Q4 q/q and 10% for CY02, our ASP assumptions have
increased for Q4 and beyond. PIVs are fairly tight right now with pricing
very firm as a result. There are three main reasons. First, PIV units were
about 800K in Q1 increasing to about 1.8M units in Q2 and 6.5M units in Q3.
The forecast was for a 2x increase in volumes for Q4 but an unforseen
bottleneck in functional test is restricting output relative to prior
expectations. Also the increasing megahertz gap versus AMD has driven higher
performance systems to Intel. Interestingly, Intel's inability to supply is
also helping AMD's quarter. We believe the testing bottleneck should be
resolved over the next 1-2 months as more Teradyne testers are brought in.
We note that in 1996, the incremental gross margin percentage was 71% as
gross margins increased from 48% in Q1 to 63% by Q4 but also driven by
revenues up 29%. For 2002, we have given Intel the benefit of the doubt and
assumed 75% of all incremental revenues reach the gross profit line. The big
difference between then and now is that Intel revenues increased in 1996 by
29% driven by a 18% increase in PC units, 11% growth in IT spending, 4% US
GDP growth and major market share gains against AMD whose revenues declined
20%. We note that IDC has forecast PC unit growth of 2% and we are
forecasting Intel unit growth of 10%. Due to slower revenue growth it is
hard to see how Intel's gross margins can increase much beyond 52% by Q4 2002
without a surge in ASPs. This seems unlikely in a slower economic climate.
We see no change to capital spending for 2001 of $7.5B with no forecast given
for 2002. In general, we believe cap ex for next year is likely to be around
$6B given most of the 0.13u equipment has already been purchased and a fair
amount of the 300mm equipment has been purchased as well. We note that
initial 300mm wafers starts are expected in Q1.
We note that there is still a fairly large disparity between talking to Intel
and talking to Dell. On 12/6, Intel will have some sell through data but
with the bulk still to come. Q1 is when hopes for PIV/XP sales will get
reconciled with actual sell through. We note that PC sales in general post
Thanksgiving have been decent but not spectacular. Lower-end boxes have seen
the greatest demand. Though we concur that the white box market is strong
compared to demand in the US, we note that Europe seems to be weaker than we
would have expected for Q4 and China's torrid growth rates also seem to be
slowing as witnessed by Legend. Japan continues to be poor. We worry that
there is an increasing mismatch between processor sales and PC sales. We
note that this cannot be explained by a major market share shift in Q4 either
as AMD also seems to be tracking slightly better than we thought. We note,
however, that poor flash demand seems to be offsetting that upside for AMD.
We continue to believe that this is a U shaped and not V shaped semiconductor
recovery and with a P/E of over 50x for CY02, we continue to recommend
selling into the earnings update on 12/6. |
