Kurlak Dogged by Lack of Respect Following Intel Flip-Flop
By Eric Moskowitz
Staff Reporter
1/6/99 10:18 AM ET
Early one Christmas-week morning, legendary Merrill Lynch chip analyst
Thomas Kurlak sounded like a broken man.
"He sounded like the walking dead on that thing," a West Coast hedge-fund
trader who requested anonymity says of the Dec. 23 conference call about
his Intel (INTC:Nasdaq) rating. "That morning was some of the creepiest
body language I've ever gotten from a call like this."
By itself the call, in which Kurlak explained his switch to accumulate from
neutral, wasn't unusual: Analysts often call clients to discuss ratings changes.
But this particular change was significant in that both the bellwether chip
maker and the Merrill sales force felt it was long overdue.
Kurlak, often described as brilliant and abrasive in the same sentence, has
been the dominant analyst on Intel, one of the technology darlings of this bull
market, for more than a decade. Now after missing a 45-point gain, Kurlak
grudgingly turned positive on Intel, 16 months after telling Merrill investors to
sell.
How the mighty have fallen. Ridiculed on Internet-stock chat rooms,
badmouthed by emboldened rival analysts, Kurlak faced being made
irrelevant. Intel executives made jokes at his expense while Merrill's vaunted
sales team turned against him.
While Intel executives have long wanted to see Kurlak become less bearish
on their company, pressure to change his tune may have been more intense
inside Merrill. In a highly unusual move, it appears that Merrill Lynch's sales
force ignored Kurlak's recommendation for more than three months, and
some even suggested that clients buy Intel, according to several sources
outside the firm. A Merrill broker confirmed this development.
The firm's sales force had been pleading with Kurlak to raise his rating on
Intel over the past few months, but to no avail. "The sales force has gone
against him for some time," says a chip analyst at another firm who
requested anonymity.
Remember, Kurlak is one of the more respected analysts on the Street. A
perennial Institutional Investor all-star, Kurlak has long been the ax on Intel
and the rest of the semiconductor sector, although TSC no longer ranks him
as such. With more than 1 million retail brokerage customers at his disposal,
Kurlak's pronouncements used to move stocks. For the first time in a long
while, the semiconductor market has been rebounding strongly in spite of
him.
What went wrong? Kurlak reiterated his bearish call last August just before
Intel told everyone that its business prospects were rosy. By mid-November,
Intel executives were only too happy to rub in their company's 30-point
stock-price jump at their semiannual analyst meeting in San Francisco.
During the presentation, executives showed clip art of two stunned-looking
investors wondering what had happened to Intel's stock price. "Those must
be Merrill clients," quipped Intel CEO Craig Barrett.
Casual observers saw it as an off-the-cuff remark, but others saw it as
something else entirely. "Since he has been wrong for so long, Intel's brass
may have wanted to send him a message that said, 'Look pal, you don't know
what you are talking about. Now hush,'" an Intel engineer says of Kurlak.
"They went right after him," adds the West Coast hedge-fund manager, who
notes that Kurlak was in attendance.
"I don't care what people say about me because they don't pay my salary,"
says Kurlak. "This is a tough business, and people are allowed to say
whatever they want."
This doesn't make him irrelevant, but it has brought out rumors that he may
be interested in leaving the sell side after two decades as an analyst. When
asked about the rumors, Kurlak turned combative. "Get the hell out of my
personal life," he said. "This is the money business; this isn't Hollywood. ... All
this talk is counterproductive to investors."
Kurlak's History with Intel
Kurlak has been a thorn in the side of Intel management for some time. In
1994, when Intel was in the teens, he beat the company's stock down with
negative calls to clients. He went bearish on Intel again in late 1995, and the
stock subsequently struggled through much of 1996. His thinking in 1996
matched that of Rick Whittington, then a II-ranked semiconductor analyst at
Soundview Financial and now a private money manager. "Kurlak was one
analyst that I feared and respected when I was on the sell side," says
Whittington, who in the fall of 1996 ventured to the buy-side to become a
money manager. "I have nothing but good things to say about him."
But then Kurlak went through a period when he couldn't decide where he
stood on the semiconductor industry. The Wall Street Journal highlighted his
"flip-flopping" on another stock that he covers, Micron Technology
(MU:NYSE), in August 1997.
Perhaps partly due to this, Kurlak reaffirmed his bearishness on the
semiconductor sector in August 1997. "We recommend intermediate-term
investors take profits," Kurlak wrote in an Aug. 26 report, which also
coincided with his reduction of his intermediate-term rating on Intel to neutral.
Until this past summer, his analysis that chip prices would continue to fall as
demand slumped was on target. Intel's stock drifted 12% lower from August
1997 to August 1998. But over the past few months, a funny thing has
happened: Chip prices improved as demand for Intel's Celeron and
higher-end Pentium II chips jumped. As this resurgence picked up steam,
however, Kurlak hardened his stance and lowered his long-term Intel rating
from accumulate to neutral this past August.
In the first half of 1998, his bearish call on Intel was considered genius, but as
summer turned to fall and as Intel's fortunes were suddenly uplifted, his
comments seemed more and more out of place.
His last bearish call on Intel was particularly ill-timed. Shortly after his August
1998 rating change, Intel preannounced that its third-quarter earnings would
be better than expected -- about $500 million in revenue better. The company
ended up generating revenue of $6.7 billion for the quarter, a whopping $800
million better than initial estimates.
For its fourth quarter, Intel said not once but twice that earnings would be
better than analyst expectations. "He has a couple of sources he has relied
on for years that have been wrong," points out the Merrill broker. Two weeks
ago, Kurlak grudgingly raised his Intel rating, provoking glee among
enthusiastic Intel investors. "They are calling Kurlak's new estimate an
upgrade. I call it Kapitulation!" said a Silicon Investor poster.
For one former sell-sider, the seismic shift in the Street's thinking on Kurlak is
not unprecedented. "When you're right, everyone wants to talk to you, but
believe me, when you're wrong, they will show you the door very quickly,"
says Whittington, who did not leave Soundview because of this. In fact,
Soundview Financial semiconductor analyst Michael O'Brien goes so far as
to say that Whittington helped put Soundview "on the map."
"All I can say to Kurlak is, welcome to the hot seat," adds Whittington.
While many are calling for his dismissal, even skeptics say he isn't going
anywhere. "He still brings in a lot of underwriting and commissions for
Merrill," says a sales broker at another firm. "I wish we had him here." |
