Paul Engle: from The Street.....Death to Kurlack
'We expect
Intel's revenue
growth rate to
accelerate and
its gross
margins to
expand in the
second half'
-- Mark
Edelstone
The Ax: Intel's Back, and So Is
Edelstone
By Eric Moskowitz
Staff Reporter
8/6/98 5:04 PM ET
Is Merrill Lynch's Thomas Kurlak losing his touch on Intel
(INTC:Nasdaq)? Maybe. For at 87 a share, the stock has
regained its footing, investors are starting to believe the
worst is finally over and analysts are hopping aboard the
industry bellwether once again.
Even as the shares have risen, however, Kurlak -- named as
the Intel ax in a TSC story on April 15 -- has remained
downbeat on the chip giant's prospects, even going so far as
to issue a fresh warning to Merrill clients Thursday that the
risk factor for the entire industry is extremely high right now.
If Kurlak is looking, as he is, increasingly wrong, then who
has the right idea? None other than Morgan Stanley chip
analyst Mark Edelstone. For if the stock continues to soar,
his bullish call on Intel will be remembered as the smart one.
That's because Edelstone called for a strong buy on the very
same day (April 15) that Kurlak lowered his long-term rating
on Intel from buy to accumulate. And for the following two
months, it was Kurlak who appeared to be the ax as PC
price declines and the Federal Trade Commission probe
conspired to send Intel's shares to a 1998 low of 65 5/8. But
since then, the stock has rallied 27% to its current price.
If anything, Edelstone feels even more strongly today about
the company's prospects, reiterating his view, which sets a
price target of 110 on the shares.
"We believe the PC inventory correction is in the process of
ending," says Edelstone, "and we expect Intel's revenue
growth rate to accelerate and its gross margins to expand in
the second half." (His firm has participated in an underwriting
of Intel put options in the last three years.) Gross margins,
he adds, should reach 53% by the fourth quarter, up from
49% in the June quarter.
If Edelstone is right, it will be a remarkable comeback for the
Santa Clara, Calif.-based giant, which has watched its
revenues erode during the first half of 1998 -- a first in Intel's
history. First-quarter revenue fell to $6 billion in 1998 from
$6.45 billion in 1997. Second-quarter revenue slipped to
$5.93 billion in 1998 from last year's $5.96 billion. In order to
post a year-over-year increase in revenue, the chip maker
will really have to have blow out revenue targets in the
second half. Recall that last year Intel's revenue rose 20%,
and the year before that it leapt 29%.
Already, there are signs of a pickup this quarter. Piper
Jaffray analyst Ashok Kumar said Thursday that the
company was off to a strong start, thanks to an increase in
sales of its new Mendocino chip for lower-end PCs.
"Third-quarter comparisons will represent the first positive
year-over-year comparisons in 1998," says Kumar, who
raised his third-quarter revenue estimate for Intel to $6.4
billion from $6.2 billion. Other analysts are jumping on board.
Bear Steans' Andy Neff and J.P. Morgan's Terry Ragsdale
have recently upped their ratings to buy on Intel.
And yet Kurlak remains downbeat. In fact, he lowered his
earnings estimates yet again on the chipmaker July 15. His
1998 earnings per share estimate now stands at $2.78, 28%
below the year-ago figure. So far this year, when Kurlak has
put out a lower earnings estimate, the rest of the Street has
meekly followed.
It's still uncertain whether they will this time. Kurlak is not
only sticking with his long-held bearish assessment, but
now warning Merrill clients that the risk factor for the entire
industry is extremely high right now. "We view the present
period as having a higher degree of risk of loss than any
period since last February," notes Kurlak.
Even talk out of Intel that it was seeing an increase in chip
demand from PC manufacturers isn't fazing him. Kurlak's
argument is that, regardless of demand, if PC prices keep
falling, it will be very hard for semiconductor producers to
suddenly raise their long-declining prices.
The key, Kurlak wrote in his recent note, is that the
low-priced PC revolution shows no sign of ebbing. In fact, he
believes the shift to low-end PCs will continue. Thursday,
Kurlak noted that the sub-$1,000 PCs could account for
50% to 60% of all PC sales within five years. "It seems
unlikely that that this sub-$1,000 surge -- having grown from
5% to an estimated 27% in one year -- will simply stop or
reverse."
So the stakes are set. While Kurlak handily won Round 1 of
his face-off with Edelstone, it looks like the Morgan Stanley
analyst took Round 2.
For the next round, the Morgan Stanley chip analyst sees
the company earning 73 cents per share in its third quarter
on revenues of 6.13 billion, after recording revenues of $6.16
billion in the year-ago September quarter. For 1998,
Edelstone sees the company earning $2.96, which are, for
the record, well below his April numbers of $3.25. The
analysts' consensus for 1998 earnings is $3.02, down from
$3.92 in February, according to Baseline. "There is
mounting evidence that everything that touches the PC --
from chip sets to motherboards -- is seeing some form of
uptick right now," says Edelstone. "And the roar is only
going to get louder." Edelstone believes that fourth-quarter
PC demand will be very strong, propelling chip makers such
as Intel higher still.
The more bearish Kurlak sees the company earning 69
cents in the September quarter, 19 cents below a year ago.
Back when Intel was trading for around 72 in late May, TSC
asked Kurlak where he saw the stock trading in the near
future. "I believe that the stock will stay in this range or go
lower over the coming months," he replied. The stock is now
trading in the mid-80s.
In a research note Thursday, he writes, "Our analysis leads
us to remain on the sidelines, anticipating that consensus to
turn negative." If Intel's stock continues to climb, Kurlak may
soon have to rethink his Intel strategy.
For more info on institutional holders of this stock, as well
as financial statements and earnings estimates, please see
the Thomson Company Reports.
See Also
THE AX
Kurlak Takes
Round 1
5/29/98 2 PM
THE AX
Kurlak Faces
Off Against a
Contender
(Again)
4/15/98 1 PM
THE AX
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