Steve, All - PaineWebber = intel supporter
Regards
-Albert
08:25am EDT 15-Oct-97 PaineWebber (John Lazlo (415)576-2980) INTC
INTEL: Q3 RESULTS; DOWNGRADE TO NEUTRAL
PW PW PW PW PW PaineWebber PW PW PW PW PW
Rating=3 (INTC)
Closing Price=$91 13/16
Current FY EPS EST=$3.75 (was $4.08)
Next FY EPS EST=$3.50 (was $4.78)
FY End=December
October 15, 1997
KEY POINTS
1. Disappointing third quarter EPS of $0.88, while up 18% over last
year, were below our $0.92 EPS estimate and $0.91 consensus. Revenues
and gross margin less than expected.
2. Fourth quarter EPS likely to be flattish with third quarter.
Lowered 1997 EPS estimate to $3.75 from $4.08 on reduced 4Q EPS estimate
to $0.86, down from $1.14.
3. Slashed 1998 EPS projection to $3.50 from $4.78 on lower revenue
assumption of $26 billion and eroding gross margins.
4. Downgrading to neutral (3) from buy (1) due to reduced 1998 earnings
prospects. Stock could trade in low $70 range based on 20 P/E times
$3.50 EPS projection.
Intel* (INTC $91 13/16) reported disappointing third quarter
financial results as EPS of $0.88, while up 18% over last year, were
below our $0.92 estimate and consensus of $0.91. The stock has been
weak of late as the whisper numbers floated around from well above the
consensus ($0.98) to well below the target. Moreover, concern about
Intel missing the quarter had a major negative impact on semiconductor
stock prices yesterday, helped by lower than expected revenues at TXN.
The principal reasons for the earnings shortfall are due to slightly
lower than expected revenues owing to reduced average selling prices, a
sequential drop in flash memory sales, and a lower sequential gross
margin of 57.7% (we expected 60%) due to the combination of lower
blended ASPs, the addition cost of the SEC cartridge that houses the
Pentium II, and lower margin on flash memory sales. This later reason
was responsible for about two of the three point drop in the gross
margin from last quarter.
The company guided analysts to a less robust than expected fourth
quarter, suggesting flattish revenues and gross profits, and higher
expenses. This suggests that EPS could be down sequentially and well
below the $1.06 posted last year. We slashed our fourth quarter EPS
estimate to $0.86 from $1.14, down slightly from the $0.88 just reported
and 19% below last year. We cut our revenue estimate to $6.3 billion
from $7.1 billion. It appears that blended average selling prices for
microprocessors could fall to an estimated $215 in the fourth quarter
form $233 in the prior period and could be below the peak estimated ASP
of $286 achieved in March. While flash memory revenues could rebound,
they only account for 5% of revenues. For the year, we cut our EPS
estimate to $3.75 from $4.08. Our revenue estimate has been trimmed to
$24.8 billion from $25.8 billion.
For 1998, we sharply reduced our EPS projection to $3.50 from $4.78
based on managements guidance that the gross margin will trend down
during the year as the Pentium II ramps production and production of P
II's become the largest portion of units by mid-year. We expect Intel
to ship 75 million units of P II and Pro for the year while sales of the
P5 are projected to drop to 30 million from 72 million this year. We
expect blended ASPs to decline slightly for the year to an estimated
$231 from $244 this year. This will occur as the low priced PC accounts
for an increasingly larger portion of the unit sales base. Although
Intel is enjoying rapid growth in mobile units, workstations and file
servers, these three markets combined account for only 25% of all
microprocessor units sold.
We downgraded the stock to neutral (3) from buy (1) as earnings
momentum appears to have stalled due to aggressive pricing that has
curbed near term revenue and earnings growth. Furthermore, as P II unit
production predominates next year, the gross margin is expected to
shrink and potentially lead to several lackluster quarters relatively
flattish EPS growth and potentially 2-3 consecutive quarters of down EPS
comparisons. Based on our new EPS projection of $3.50, it appears that
Intel's shares could trade down to the low $70's region suggesting 20%
down side in the stock. RISKS relate to the extent of PC demand,
seasonally, the impact of Mpu pricing and demand on the gross margin and
the transition to the next generation P II family. |
