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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Paul Engel who wrote (83150)	6/9/1999 2:27:00 PM
From: GP Kavanaugh	Read Replies (2) \| Respond to of 186894

Alex. Brown gives INTC the Strong Buy. GP --------------------------------------------------------------------- 01:14pm EDT 9-Jun-99 Deutsche Banc Alex. Brown (E. Klauer/N. Bolton) INTC INTC: Update: Is The Recent Pullback Overdone?-Strong Buy Klauer, Erika 212-237-2234 06/09/1999 Bolton, N Quinn (212) 237-2436 Deutsche Banc Alex. Brown ------------------------------------------------------------------------------- INTEL CORPORATION (INTC) "STRONG BUY" Update: Is The Recent Pullback Overdone? ------------------------------------------------------------------------------- Date: 06/09/1999 EPS: 1998A 1999E 2000E Price: 53.0 1Q 0.41 0.57A NE 52-Wk Range: 72 - 33 2Q 0.33 0.54 NE Ann Dividend:0.12 3Q 0.44 0.59 NE Ann Div Yld: 0.23% 4Q 0.59 0.68 NE Mkt Cap (mm):172,334 FY(Dec.) 1.77 2.38 3.00 3-Yr Growth: 20% FY P/EPS 29.9X 22.3X 17.7X CY EPS 1.77 2.38 3.00 Est. Changed No CY P/EPS 29.9X 22.3X 17.7X ------------------------------------------------------------------------------- HIGHLIGHTS: Intel shares have been under a good deal of pressure recently based, in our view, on fears that business is running slower than expected. Specifically, many analysts have speculated that average selling prices have come under great pressure due to lower priced Celeron products eating into the demand for the Pentium III product line. Intel has also suffered from perceptions that the Pentium III does not really offer significant performance gains versus the Pentium II. We believe that a three pronged strategy is emerging at Intel. The first leg is the traditional Intel architecture group. We believe that this group will be focused on enhancing the computing power of desktops, servers, mobile PCs and handheld devices. At the low end, we believe that Intel's products will focus on end markets committing to viewing, particularly for Internet access and digital photography. In the middle price point, we think Intel's products will enable data creation, for workstation type applications and at the high end, Intel's server based products will focus on data sharing, which is a great MIPS user. The products will include not only processors but supporting products such as graphics and flash memory chips and architecture enhancements such as AGP (Advanced Graphics Port) as well. The second leg of Intel's strategy in our opinion is networking. This business should grow between 50 and 60% for the next several years if Intel can execute according to plan. Intel's products will center on silicon and end market products such as network interface cards (NICs), for example. We believe that this business posted sales of just about $550 million in 1998 and should approach $900 million in 1999. These estimates do not include the recent acquisition of Level One which could also add significantly to Intel's presence. We believe that Intel's Level One acquisition alone can generate more than $300 million in revenues, and thereby boost Intel's total networking related sales to more than $1 billion in 1999. The third leg of Intel's strategy in our opinion is the New Business Group. This group will focus on its own investment fund, offering products that enable PCs to connect to one another and various peripheral devices (such as digital cameras), building Internet data centers and offering Internet content services. More simply put, we believe that Intel is putting together a business division that is geared toward Internet support and services. Of the three divisions, this last one is clearly the newest and most unique to Intel's typical business model. How is the strategy working so far? Certainly, the majority of Intel's sales and profits are being derived by the architecture group at this point with networking growing the fastest but still off a much smaller base. What about the near term? We believe the current quarter is on track due to continued strength in PC unit growth and Intel's recent gains in market share at the expense of AMD (production problems) and National Semiconductor/Cyrix (exiting the business). Server unit growth has also been solid this quarter. In other words, the unit growth picture looks quite good, even in the face of concerns that hardware spending should slow due to Y2K. The average selling prices are coming down quickly, evidenced by the fact that many of the Pentium IIIs are selling for close to the prices of Pentium IIs. What about costs? If we examine the critical elements of Intel's cost - fixed (i.e. depreciation) and variable (materials, labor, etc) - we believe both are witnessing significant slowing in growth. Depreciation for example, which appears in the cost of goods sold line, is slowing to the slowest growth seen in years. Depreciation is expected to equal $3.3 billion this year and we believe this number should not change. If we take a closer look at quarterly patterns of growth, we can observe a compelling trend. Depreciation grew at 31% and 32% on a year over year basis in the third and fourth quarters, respectively, of 1998. The growth was only 25% in the first quarter of 1999. But the growth should slow even further to 19% in the second quarter, 16% in the third quarter and 12% in the fourth quarter. Given that depreciation is such a significant expense, this slowing should provide Intel with a significant cushion against gross margin decline. Outside of depreciation, we also see Intel taking significant steps to lower costs. The company's strict control on new hires as well as some headcount reduction has been well documented by the press. Materials costs are also being slashed. For example, the company is moving to the SECC2 package for its processors which offers a 10% cost advantage over the SECC1. Intel is moving to integrate its level two cache memory to further reduce material costs. The company is also aggressively moving to 0.18 micron. We estimate that close to 100% of Intel's output will be 0.25 micron in the second quarter but we believe that 100% of Intel's output in the second quarter of 2000 will be 0.18 micron. This fast ramp should also aid in Intel's endeavors to reduce costs. Additional Information Available Upon Request Deutsche Bank Securities Inc. maintains a net primary market in the common stock of Intel Corporation. The following stock(s) is (are) optionable: Intel Corporation. First Call Corporation - all rights reserved. 617/345-2500 END OF NOTE