Thread:
Intel in the eyes of Morgan Stanley - interesting viewpoints, especially in light of their upcoming pricing adjustment. Question is: will they take earlier action like last quarter, or will they go with their regular 'middle of quarter' price drop strategy?
Also, it will be very interesting to see how they migrate from merely a chips company to a full-solution provider (as in more of the PCA business they are already in heavily, as well as their chipset/CPU package they now use to elbow out people like VIA).
Opinions??? What about margin aspects???
K.
INTEL CORPORATION: PC DEMAND APPEARS TO BE SOLID BUT WE EXPECT INTEL TO BE...
08:04am EST 25-Nov-97 Morgan Stanley\DW (Edelstone, Mark)
Intel Corporation (INTC): PC Demand Appears To Be Solid But We Expect
Intel To Be More Aggressive On Pentium II Prices To Help Accelerate
The Pentium II Transition Lowering 1998 Earnings Estimate To Reflect
Lower Margins
Rating: Outperform Price: 78
52-wk Range: $102-$60 Price Target: 100
______________________________________________________________________
FY Ends ----EPS---- Rel. P/E
December Curr Prior P/E (S&P 400) Pr/Bk
r
96A $2.92 26.8x 104% 8.3x
97E $3.80 20.6x 86% 6.5x
98E $4.00 $4.20 19.5x 90% 5.0x
______________________________________________________________________
Qtrly ---- 1Q ---- ---- 2Q ---- ---- 3Q ---- ---- 4Q ----
EPS Curr Prior Curr Prior Curr Prior Curr Prior
96A $0.52 $0.59 $0.74 $1.06
97E $1.10A $0.92A $0.88A $0.90
98E $0.90 $0.95 $0.92 $1.01 $1.03 $1.05 $1.15 $1.19
______________________________________________________________________
5 Yr. EPS Growth: 20% Debt to Equity: 3%
Dividend: $0.12 Yield: 0.2% Mkt Cap./Rev: 480%
Shares Outst.: 1,797 MM Mkt Cap.: $140,000
MM
______________________________________________________________________
DETAILS
With the exception of high-end notebook PCs, we believe overall PC
demand remains strong. Although just-in-time delivery schedules limit
near-term visibility, we believe PC sell through has been strong thus
far in the fourth quarter, and we believe Intel will achieve its
guidance for slight sequential revenue growth and flat to slightly
higher gross margins. However, we believe more aggressive Pentium II
microprocessor (MPU) price cuts will lead to lower-than-expected
revenue growth and gross margins in the first half of 1998. As a
result, we have lowered our 1998 earnings-per-share estimate to $4.00
from $4.20, and our new estimate compares with a consensus estimate of
$4.19. Despite our reduced earnings estimate for 1998, we believe
Intel's franchise will grow stronger during the Pentium II cycle, and
margins should expand and the company's revenue growth rate should
accelerate in 1999 as Intel continues to increase its penetration into
the high-end enterprise computing segment.
WE EXPECT INTEL TO BE MORE AGGRESSIVE ON PENTIUM II PRICES TO DRIVE
THE PENTIUM II TRANSITION
Following meetings with various PC, motherboard, and semiconductor
companies at Comdex last week, we believe Intel's Pentium II price
cuts will be more aggressive than we previously estimated. Although
Intel's normal quarterly MPU price cuts are not due until February 1,
we believe the company will lower some of its Pentium II prices on
January 1. In addition, we believe certain high-volume customers may
receive a price break in December. We believe the timing and
magnitude of Intel's MPU price cuts are primarily being done to help
accelerate the Pentium II product transition. However, we believe
market share gains by the top-tier PC companies and the competitive
threat from Advanced Micro Devices' (AMD--$22, rated Neutral) K6 have
temporarily provided some of Intel's larger customers with incremental
pricing power.
We believe Pentium II represented around 10% of Intel's third-quarter
unit shipments, and although they have continued to grow, we believe
the lack of compelling applications has limited the demand pull for
Pentium II. In addition, we believe Intel's aggressively priced
Pentium MPUs with MMX technology have continued to offer corporate and
consumer PC buyers with a very compelling near-term PC solution.
While we expect the Pentium II transition to largely be completed by
the end of next year, we believe Intel has decided to use price as a
tactical weapon to help push the transition along.
AND GROSS MARGIN PRESSURE SHOULD BE EXPECTED UNTIL HIGHER-PERFORMANCE
PENTIUM IIS RAMP AND INTEL'S 0.25-MICRON PROCESS TRANSITION
ACCELERATES
Although we believe Intel's more aggressive pricing strategy will
likely promote elasticity of demand and the potential for an
acceleration in Pentium II unit demand next year, we believe gross
margin pressure can be expected during the first half of next year.
As Intel's product mix richens with higher speed Pentium IIs and the
company transitions to its more economical 0.25-micron process
technology, we believe gross margins will recover in the second half
of next year.
INTEL'S MISSION IS TO MOVE THE MARKET TO PENTIUM II IN 1998
Intel's goal is to reach the unit crossover for Pentium II in the
second quarter of next year, and we expect the company to phase out
Pentium production by the end of 1998. By the fourth quarter of 1998,
we believe Intel's Tillamook MPU used in notebook PCs will account for
virtually all of the company's Pentium shipments. In addition to
using price as a tactical weapon to move the overall PC market to
Pentium II next year, we expect Intel to proliferate the high and low
end of the product line to provide a wide variety of price-performance
solutions.
We believe Intel is currently sampling its 440BX chip set, and we
expect the company to formally introduce and commence volume shipments
of this product in the second quarter of next year. The 440BX chip
set will support Intel's higher speed and 100 MHz system bus Pentium
II versions, while the existing 440LX chip set will continue to
support the 66 MHz systems bus with internal frequencies up to 333
MHz. Intel is currently shipping 233, 266, and 300 MHz versions of
Pentium II, and we expect speeds of 333, 350, and 400 MHz to be
introduced in the first half of next year.
In the second half of next year, we expect Intel to introduce a 450
MHz version of its Pentium II, and we expect this final member of the
Deschutes product line will lead to the fourth-quarter introduction of
Katmai. Katmai is the code name for Intel's Pentium II MPU that
incorporates Intel's second generation MMX instruction set to leverage
3D graphics. We believe Katmai will be the final version of Intel's
desktop Pentium II MPU family. We expect Intel to introduce its
Willamette and Merced products in 1999, and while Willamette will
represent the next 32-bit generation MPU product family, Merced will
represent the first implementation of Intel's IA-64 generation of 64-
bit processors.
In addition to proliferating the high end of its MPU product line, we
believe Intel will provide low-end Pentium II solutions to address the
$1,000 PC market in the second half of next year. While any increase
in the low-end of the market will likely put pressure on Intel's
average selling prices (ASPs), we believe the company's ability to
continue to introduce high-end solutions for the high-performance PC,
workstation, and server market will enable the company's overall ASPs
to steadily rise as 1998 unfolds.
AND INTC'S P/E MULTIPLE SHOULD EXPAND AS THE PENTIUM II PRODUCT CYCLE
ACCELERATES
Given near-term product transition issues, more aggressive Pentium II
pricing, the move to a build-to-order model by key OEM customers, and
weakness in some of the Asian markets, we expect Intel's annual
earnings-per-share results to reflect negative comparisons in the next
two to three quarters. While slower revenue growth and negative
earnings comparisons will likely cause INTC to be locked in a trading
range and trade in line with the market during the next several
months, we believe a successful transition to its O.25-micron process
technology and an aggressive transition to Intel's Pentium II product
family by the middle of next year should enable the stock's multiple
to expand.
Based on our new 1998 earnings estimate, INTC is currently trading at
nearly a 10% discount to the S&P 400, and the stock's relative P/E
multiple has been steadily improving during the last five years.
During the 486 and Pentium product transitions, INTC's relative P/E
multiple began to expand once its revenues from the latest generation
MPU crossed over the prior generation, and we currently expect Intel's
Pentium Pro/Pentium II revenues to exceed Pentium in the first quarter
of 1998. Once that occurs, we believe INTC will be able to trade at a
premium to the market for the balance of the year. Until then, we
believe the stock will find solid support in the mid to high 60s. Our
12-month stock price target of $100 is based on the belief that INTC
should be fairly valued at a 10% premium to the market multiple, and
we maintain our Outperform rating on the stock. |
