Elmer & thread
cnbc.com
STOCKS ANALYSIS
Oct 13 1999 4:01PM ET
Many Analysts Are Still Bullish On Intel
by John W. Schoen
Senior Producer
MSNBC
"In terms of red flags related to demand or strategy, they're
not there."
-- Vadim Zlotnick, Sanford C. Bernstein
Investors who sold Intel Corp. {INTC} stock after the company posted disappointing
third-quarter results may have unloaded shares too soon. Analysts who follow the
company are generally upbeat about the chip makers' prospects for the fourth quarter
and beyond.
Intel shares slid more than 6 percent Wednesday, after the company broke the
bad news to the Street late Tuesday. Third-quarter profits came in at 55 cents a
share -- up 21 percent from the third quarter a year ago but two cents below
analysts' consensus estimate. Revenue jumped nine percent from a year ago to
$7.3 billion.
Intel Corp. {INTC}
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But after hearing the company?s conference-call explanation, most analysts
remain positive on the stock. Among them, Salomon Smith Barney reiterated its
"buy" rating and target price of $95 a share.
Intel says profits got hit on several fronts, including delays in a transition to a new
manufacturing process called "0.18 micron," which refers to the width of circuits
used to etch transistors on a computer chip. Those smaller widths increase
performance and lower production costs. Without those delays, the company told
analysts, it would have met forecasts.
Profits were also hurt by continued price pressures and supply problems resulting
from the Taiwan earthquake. But Vadim Zlotnick at Sanford C. Bernstein thinks
investor disappointment may have been overdone.
"This is an issue of execution; it?s not demand or strategy," Zlotnick says. "In
terms of red flags related to demand or strategy, they're not there."
Indeed, most analysts say the outlook for the fourth quarter is promising. Based
on Intel?s conference call, most are looking for profit growth of 7 percent to 9
percent. The company expects a revenue boost from the launch of new high-speed
chips, including a 700-megahertz Pentium III chip. And Intel says margins should
be higher and production problems caused by the Taiwan earthquake should be
fully resolved.
But the company stresses that it still face uncertainties in forecasting the quarter,
and even Intel bulls concede there are plenty of reasons to be cautious. Although
he remains positive on the stock, CS First Boston analyst Charles Glavin says the
timing of Intel's production problems couldn't be worse.
"You can afford to have a delay during the summer and get that back," Glavin
says. "But when you?re talking about the fourth quarter, the specs and boards
should have been set and locked by now, and people should be worried about
satisfying demand and working on the ad campaign."
Intel?s fourth quarter is also clouded by uncertainties about the release of
Microsoft?s next-generation Windows 2000. In the past, new Windows releases
have spurred corporate clients to upgrade their computer networks. But with Y2K
worries looming and 1999 spending budgets set, Glavin sees a spending boost
happening before year's end.
"Even if Microsoft gave away NT 200 for free, we don?t think there would be
significant deployment," Glavin says.
Over the longer term, demand for Intel chips looks strong. Charles Boucher,
semiconductor analyst at Bear Stearns, says the rapid growth of Web-based
businesses will continue to spur strong demand for the high-end chips that power
those Web servers.
"Analysts in this business have consistently
underpredicted just how strong and how large a
market that is," he says. "If you look at the number of
e-commerce transactions over the next several years,
it's going to multiply by several fold. And the number
of devices attached to the Internet will do the same
thing."
That growth will provide a big boost to Intel?s bottom
line, Boucher says.
"It?s a huge margin upside," Boucher says. "You're talking $1,000 per chip vs.
$100 or less per chip for the low-end PC."
Click Here to See Boucher's Interview on CNBC's Squawk Boxfrom earlier this
morning.
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Although most analysts remain positive, there are dissenters. One of the most
vocal is Drew Peck of SG Cowen, who downgraded Intel to "neutral" from "buy"
Wednesday based on the third-quarter earnings shortfall.
"Prices are falling dramatically right now," Peck told CNBC. "And I don't see any
let-up in that."
Peck conceded that, with $11 billion in cash, Intel will remain a preeminent
technology company. But he thinks "the microprocessor business as I see it is
history: it will never provide the kind of returns in the future it as has in the past.
Intel knows this and moving in new directions."
Those new directions are proving costly, Peck said. Third-quarter acquisitions
included network chip makers Level One Communications and privately held
Softcom Microsystems, and Dialogic, which makes telecommunications hardware
and software.
"These things are more of an expense burden than they are a positive right now,"
Peck said. "Some day that will turn around. But I think for the foreseeable future,
expense load will be fairly high at Intel, and it has to be a little bit worried."
But even those investors who dumped Intel shares
say they may return as buyers another day. Bill
Keithler, portfolio manager of the Invesco Technology
fund, sold Intel shares yesterday. Although he?s also
concerned about Intel?s fourth quarter, he says he
likes the stock longer term.
"We think the Year 2000 will be a strong year for the
technology spending," Keithler says. "And with
Windows 2000 being released and need for corporate upgrades on both the PC
side and software side, Intel should feel strong demand." |
