ML Osha:FlashNote Intel Corp Results Preview
Reason for Report: Company UpdateINTC; $34.61; B-2-2-7
Reported EPS (Dec): 2000A $1.65; 2001E $0.47; 2002E $0.69
• We expect Intel to set its revenue target for the fourth quarter towards the
high end of its previous target range, between $6.6 billion and $6.8 billion,
when the company issues its mid-quarter update later. Our current
estimate is $6.658 billion, up 1.7% sequentially, and we acknowledge that
the estimate may be low by $100 million or so. Our earnings estimate
stands at $0.09, down from $0.10 last quarter, although the decline is due to
a higher effective tax rate in the fourth quarter. Our operating earnings
estimate of $1.09 billion is up from last quarter’s $989 million. Investment
recommendations on the stock stand at accumulate for both the
intermeaiate term and long term.
• The strength that Intel has seen in P4 during the quarter has driven
speculation about much higher numbers for the fourth quarter, but we do
not think that forecasting high single digit or low double digit sequential
growth is reasonable. Our unit shipment estimate for the fourth quarter is
already upbeat at 30.7 million units, up from 27 million units in the third
quarter. That estimate includes 15 million units of P4, up from 12.5 million
in the third quarter and 3.3 million in the second. It is quite possible that
P4 units may be even higher than we expect, but rather than raising the
total unit number for the quarter we believe that P3 shipments would be
impacted instead. We are currently forecasting 6.5 million units for P3,
down from 7.5 million during the third quarter.
• Intel should benefit from the shift towards higher-priced P4 in terms of
ASP, but there are other factors to be considered. First, P4 ASPs have been
falling rapidly. Our model shows P4 ASPs for the fourth quarter at $165,
down from $180 in the third quarter and $295 in the second. Intel’s lower-priced
Celeron products also see a seasonal surge in the fourth quarter, and
at ASPs below $100 they drag Intel’s overall pricing down. We would also
point out that demand from corporate buyers has been weak, which raises
doubts about any upside surprise from Intel’s higher-priced corporate
desktop solutions or server solutions. Overall, we have Intel’s ASP
declining by 8% during the fourth quarter, from $180 to $167, and we
think that the company will be hard-pressed not to show at least a 5%
decline.
• The strength that Intel has seen this quarter
has not been driven entirely by inventory
building. Inventory is certainly part of the
equation, and our supply chain analysis
showed OEM, EMS, reseller and motherboard
manufacturer inventory back to mid 2000
levels as a percentage of revenue. With P4
ramping, inventory restocking is normal.
However, we also note that our checks have
revealed more strength in the clone market
than expected – our analysis does not capture
revenues from the fragmented clone
marketplace. With modest restocking, and
using PC analyst Steve Fortuna’s estimate of
mid single digit sequential unit growth in the
quarter, we do not believe that we will emerge
from the quarter with an inventory problem.
• We upgraded our intermediate-term rating on
Intel from neutral to accumulate
approximately 7 weeks ago because we
believed that the company should see gross
margin expand during 2002, driving earnings
estimates that are higher than consensus. Our
own EPS estimate for 2002 stands at $0.69.
While we are glad to see the stock move
upwards on optimism regarding fourth-quarter
demand, we acknowledge that any
disappointment on PC sell-through could
render the stock vulnerable to a selloff during
the first quarter. We think attempting to time
the stock over the next quarter is too difficult
to attempt, however, and we are buyers based
on our outlook for improving earnings for all
of 2002 regardless of what happens during the
remainder of Q4. Should the stock sell off in
Q1, we would become more enthusiastic
buyers. |
