Headline: Intel Corp: Mixed News - Price Cut Confirmed; 4Q EPS to Meet Guidance
Author: M. A. Gumport, CFA/C.Gangi 1(212)526-5368/3754
Rating: 2
Company: INTC
Country: EPS CUS
Industry: SEMICO
Ticker : INTC Rank(Prev): 2-Outperform Rank(Curr): 2-Outperform
Price : $70 3/16 52wk Range: $102-52 Price Target: $ 90
Today's Date : 12/24/97
Fiscal Year : DEC
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EPS -1996-- -----1997-------- -----1998------- -----1999------
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 0.51A@* 1.10A* 1.10A* 0.90E 0.90E 1.05E 1.05E
2nd: 0.58A* 0.92A 0.92A 0.95E 0.95E 1.10E 1.10E
3rd: 0.74A* 0.88A 0.88A 0.95E 0.95E 1.10E 1.10E
4th: 1.06A* 0.86Ex 0.88Ex 1.00E 1.00E 1.20E 1.20E
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Year: $ 2.90A@* $ 3.76Ex* $ 3.78Ex* $ 3.80E $ 3.80E $4.45E $ 4.45E
Street Est.: $ 3.82E* $ 3.80E $ 4.28E $ 4.11E $4.60E $ 4.66E
@-Includes 1Q96 $-0.01 inventory write-down; *-Split adjusted; x-4Q97 excludes
$-0.06 in process R&D write-off for anticipated acquisition.
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Net Cash per Share* : $5.62 Revenue (1997) : $25.0 Bil.
Return On Equity* : 34.6 % Proj. 5yr EPS Grth : 15.0 %
Shares Outstanding(z): 1797.0 Mil. Dividend Yield : 0.2%
Mkt Capitalization : $126.1 Bil. P/E 1997; 1998 : 18.6x; 18.5X
Book*;Price/Book : $11.42/sh;6.14x Convertible : None
Disclosure(s) : C
*Puts in Equity unexercised; z-Share equivalents
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** MIXED NEWS: 12/29 PENTIUM 2-233 PRICE CUT CONFIRMED; 4Q EPS TO MEET
GUIDANCE
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THE BAD NEWS: MANAGEMENT CONFIRMS PRICE CUTS DUE 12/29 AND 1/23. In
discussions yesterday, management indicated that customers were informed
quite some time ago that price cuts on the Pentium-2 (P2)-233 would be
brought in from the end of January to the end of December. Management also
indicated the move was in response to customer requests to accommodate a build
to order model with faster new product cycles. Rumors on unannounced price
cuts and deals have circulated for the past month, but this is the first
confirmation we have had from management. We saw spot prices for the P2-233
drop 20% during the past week from $375 to $306; they declined another 1%
yesterday to $302 (range: $290-314). We show Intel's last list price 11/1 at
$401 for parts with 256K cache; the spot market price we track purports to be
for parts with 512K of cache. WE BELIEVE THE PRICE CUT LARGELY REFLECTS THE
FACT THAT AMD-$17 15/16-1 IN THE PAST 2-3 WEEKS BEGAN DELIVERING VOLUME
QUANTITIES OF K6-233s. STILL, AT THIS DATE, THESE CUTS HAVE NO IMPACT ON 4Q
RESULTS, AND OUR MODELS ALREADY ASSUMED THE P2-233 WOULD BE CUT TO $270 AT THE
END OF JANUARY, SO THE ONLY REAL NEWS IS THE TIMING OF THE CUTS. THEY
UNDERLINE A MORE COMPETITIVE PRICING ENVIRONMENT AND THE FACT THAT, TO SOME
DEGREE, PRICING LEVERAGE HAS SHIFTED FROM THE SELLER TO THE BUYER.
THE GOOD NEWS: TIMING OF 0.25 MICRON TRANSITION APPEARS TO HAVE ACCELERATED
BY 3-6 MONTHS AT INTEL, SLIPPED 3 MONTHS AT AMD. Intel management indicates
the move to 0.25 micron will be nearly complete by year end 1998. That is
about 6 months earlier than the apparent schedule 6/3/97 at their analyst
meeting. AMD, meanwhile, had been scheduled to be 100% 0.25 micron my mid-1998,
but we guess that has slipped by 3 months. So AMD has gone from a
(Cont'd)
INTC (Cont'd) p.2
claimed lead to claimed parity. THE REAL BATTLE IN 1998 WILL BE INTEL's
PUSH TO 0.25 MICRON P2 SLOT 1 CHIPS VS. AMD's 0.25 MICRON K6 SOCKET 7. ALL
THAT CAN BE SAID AT THE MOMENT IS THAT AMD IS STILL IN THE RACE.
FINE TUNING 4Q EPS UP (STILL BELOW CONSENSUS); NO CHANGE IN 1998. Intel
recently entered its quiet period still indicating it was on track to meet 4Q
guidance of some sales growth, flat gross margin, 10-15% increase in operating
expense, $160 mil. in other income, and a 35.5% tax rate. Intel throughout
1997 has beaten its operating expense estimates, so there is again some upside
opportunity from control of this item. We assume 5% sales growth, flat gross
margin, and 12.5% growth in operating expense (slightly higher sales growth
than previously) and estimate 4Q EPS at $0.88 (old: $0.86) vs. consensus of
$0.90. We continue to estimate 1998 at $3.80, 1999 at $4.55.
VIEWPOINT: THE BIG DROP IN INTEL's STOCK PRICE IN RECENT MONTHS IS CLEARLY
BUILDING A VALUE STORY. NEED SOME MOMENTUM. DON'T REALLY SEE IT NOW. At
roughly 3.5x a market sales multiple and 1.1x a market multiple of book, Intel
is in the lower third of its historical range. We also believe Intel merits
selling in a higher range than the one it has recently enjoyed. Technology
stocks, however, need momentum, and we just do not see that now. The
principal issue at Intel during the past 9 months has been the reemergence of
competition and a consequent much more competitive pricing environment which
has pushed gross margins down. Asia-Pacific is also an issue, though the
impact of that is less clear currently (30% of Intel's sales are into Asia-Pacific,
but about half of that is reexported). WE SEE COMPETITION AS THE KEY
NEAR TERM DETERMINANT OF MOMENTUM AND STOCK PRICE. WE REMAIN CAUTIOUS NEAR
TERM.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities. |
