CSFB rates INTC a BUY, target $75 5/13/99
BUY
USD 62.50
LARGE CAP
Intel Corporation (INTC)
Pentium price cuts normal given seasonality, Buy on weakness
Summary
Anticipated price cuts by Intel on Pentium-III are significant
, but expected. In all of its Pentium launches, Intel has
made price cuts during May for the summer season in excess of
30%, typically 2-3 quarters after the introduction to
stimulate high volume demand.
As we have mentioned, we expect ASPs to drift down slightly
due to normal seasonality entering the summer, the successful
penetration of Celeron into emerging markets, and a lack of
new product introduction.
We believe that concerns over Intel's price cuts next week
may be exaggerated. Intel's actions are consistent with our
guidance and estimates.
We continue to believe that 1H99 will be fairly uneventful
for Intel while new products, and the stronger season should
invigorate the stock in 2H99. As such, our estimates and
price target ($75) on Intel remain unchanged, but we would
recommend buying on weakness.
Price Target Mkt.Value 52-Week
5/13/991 (12mo.) Div. Yield (MM) Price Range
USD 62.50 $75 $0.12 0.2% $217,375.0 71.84-32.83
Annual Prev. Abs. Rel. EV/
EPS EPS P/E P/E EBITDA
12/99E $2.66 23.5X 80% 13.5
12/98E $2.32 26.9 91% 15.5
12/98A $1.77 35.3 116% 17.6
March June Sept. Dec. FY End
2000E 0.60 0.62 0.68 0.76 Dec.
1999E 0.57 0.55 0.58 0.62
1998A 0.41 0.33 0.44 0.59
ROIC (12/98) 28%
Total Debt (3/99) 699
Book Value/Share (3/99) $7.11
WACC (12/98) 11%
Debt/Total Capital (3/99) 3%
Common Shares 3,478
EP Trend2 Positive
Est. 5-Yr EPS Growth 17%
Est. 5-Yr. Div. Growth 10%
1On 5/13/99 DJIA closed at 10,000 and S&P 500 at 1384.
2Economic profit trend.
Intel is the world's largest semiconductor company and the
largest supplier of microprocessors (CPUs) with an estimated
80% unit share of the PC processor market. The company is
also the largest supplier of Flash memory and PC chipsets and
a leading supplier of low-end networking solutions.
Price Cut Concerns Exaggerated
There has been a lot of talk recently about the anticipated
price cuts by Intel on P-III that we believe may be
exaggerated. We believe that Intel will cut prices on Pentium
-III processors next week, with some cuts in excess of 30%,
but we view this as normal. In addition, as we have written
in earlier notes, Intel's overall ASP is expected to drift
lower in 2Q, but again, this is consistent with our guidance,
seasonal factors and our expectations. In the following text
we address the major concerns:
ASPs are declining in 2Q: We believe that the ASP for Intel
processors will decline modestly from the $215-219 range in
1Q99 to the $210-215 range for 2Q99. The migration to
Celeron may have contributed to these declines, but we
believe that the effect is somewhat exaggerated now due to
seasonality and a lack of new products on the high-end. The
second quarter tends to be a seasonally weak period for high
end PCs both in the consumer and corporate sector. Celeron
has successfully penetrated emerging markets, especially Asia
, but we view this as a positive since the sub-$1000
configurations are better suited for those demographics.
Without it, PC sales to emerging markets would be
significantly lower and dominated more by tier 3 and 4 unbranded
OEMs (the "Mom & Pop" white box makers).
Celeron has also made some inroads into the corporate market,
but we believe that penetration will be somewhat limited. Why?
IT managers will find stripped down boxes (i.e. sub-$1000
PCs) to be limiting in terms of long-term needs. We use the
analogy of a parent who buys clothing for growing children.
Mom and Dad tend to buy the clothes a little loose so the
kids can grow into them, and "upgrade" when it gets a bit too
tight to wear. With Windows2000 and NT5.0 coming soon, and
the fact that hardware is a small percentage of the total
cost of ownership (TCO) to operate a corporate PC, (roughly 20
% of TCO according to Gartner), we believe that the
scalability of $2000 Pentium-II-based systems is still more
attractive than sub-$1000 Celeron-driven systems. We would
estimate that an IT manager may have to turn over a suite of
sub-$1000 PCs 2-3 times over a four to five year period -
which is roughly the life cycle of a fully configured,
scaleable $2000 system. It is not just the Celeron processor
that drives the PC price sub-$1000 but the fact that these
systems and specific chipsets support less bays, add-on cards
, and network features than a regular PC. This limits the
ability to upgrade the network interface, local graphics, or
remote manageability that IT managers may require.
34% price cuts are normal: When you look at previous
processor introductions/ramps and Intel market segmentation
strategy, the possibility of 34% price cuts on the Pentium-II
line is not abnormal. Looking at the table below, you can
see that in each of the last four new processor introductions
, Intel cut prices 30-40% roughly two quarters after the
processor was introduced, entering the summer. Intel
generally cuts prices this aggressively to move the processor
from early innovator buyers to high volume purchases. In
addition, Intel uses these price cuts in order to split the
current Pentium-II segment so that low end buyers move to new
Celeron processors, while higher end PC buyers move to the
Pentium-III.
Exhibit 1: Intel Price Cuts Scheme
Processor Introduction date Summer Price Cuts*
Pentium (P54C) 1994 May 1995 29-31%
Pentium Pro 11/95 May 1996 31-39%
Pentium w/ MMx 1/97 July 1997 49-51%
Pentium-II 5/97 May 1988 26-34%
Pentium-III 1/99 May 1999 30-35% estimate
Source: Company reports
For the Pentium-II, the price cuts during the following
February, 1998, (or three quarters after introduction) ranged
from 28-33%. In the case of the Pentium with MMx, the May
1997 cuts for the 166-MHz and 200-MHz processors were
relatively modest (24% and 9%, respectively), in anticipation
of the July 6, 1997 introduction of the Pentium with MMx 233
MHz).
After next week's anticipated price cuts, the P-II and P-III
450 MHz processor should be at the same price, or roughly $275
. This strategy should enables the migration of customers
from the P-II to P-III based purely on better performance not
on price differentials. On the other hand, the P-II 350Mhz
should be priced around $160, should will be between the
expected price for the Celeron 466 MHz and the price for the
Celeron 433 MHz, motivating potential buyers to migrate form
lower speed Pentium-II processor systems to Celeron-based
systems. Again, this is a normal processor pricing strategy
used in numerous prior processor generations.
BUY ON WEAKNESS
All of this being said, we continue to believe that 2Q99 will
not be very exciting at Intel. Rather much of the excitement
will come from the ramping of the Pentium-III and continued
reduction in material costs out of the processors in the
second half of 1999. We would not be aggressive buyers of
the stock until mid-99. Instead we would advise that
investors buy the stock on weakness. As the industry emerges
from normal summer weakness (especially Europe) and Intel
introduces new laptop processors (Coppermine) and chipsets (
such as the 810e for PC-133 memory) - both expected around
September, we believe the stock will act more favorably.
We are not changing our outlook or estimates on Intel as
these observations are consistent with our previous guidance
and reflected in our earnings model. Our 1999 and 2000 EPS
estimates are $2.32 and $2.66. |
