Amy,
Here is Ashok's report. Seems he is using Intel as the whipping boy for greater economic problems.
Intel Corporation (INTC - 27 7/8) March 19, 2001
Ashok Kumar, CFA, 650-838-1414, akumar@pjc.com
Cash Is King
Rating: Buy, Aggressive (#)
Price: $27 7/8 52-Week Range$75 13/16 - $27 1/16
FY End:December
Shares Out (Bil) 6.94
EPS* 1999 2000 2001E Market Cap (Bil) $193.5
Mar $0.29 $0.35 $0.15E Average Daily Volume (Mil) 55.8
Jun $0.25 $0.37 $0.13E Book Value $5.38
Sept $0.28 $0.36 $0.15E Dividend $0.08
Dec $0.35 $0.38 $0.18E Debt/Total Cap 1.8%
FY $1.16 $1.46 $0.60E 3-5 Year EPS Growth Rate 20%
P/E 24.0x 19.1x 46.5x Mkt. Cap. /FY00 Revenue 5.7x
Mkt. Cap. /FY01 Revenue 7.4x
Revs ($ Bil)1999 2000 2001E 01 P/E to Growth 2.3x
Mar $7.1 $8.0 $6.5E
Jun $6.8 $8.3 $6.1E
Sept $7.3 $8.7 $6.5E
Dec $8.2 $8.7 $7.0E Quarter End March 31, 2000
FY $29.4 $33.8 $26.1E Reporting Date April 2001
Tables may not add due to rounding. Q2 2000 pro forma (excludes charges and
investment gains).
Highlights:
--A full-fledged recession in 2H01 across commercial and consumer segments is expected to result in negative growth rate for the PC market for 2001.
--Multiple platform transitions - Willamette/Rambus to Willamette/SDRAM to Northwood/SDRAM - before Intel gets the recipe right with Northwood/DDR in 1H02.
--We do not expect a sustainable cyclical recovery for the PC market till 2H02, at which time Intel should be well-positioned.
--Stock could retest the valuation troughs of 1998 (20x TTM P/E)or high teens.
It is clear that technology has entered a global recession. Much of the current IT spending weakness is due to a soft U.S. and global economy,and sales will undoubtedly pick up again once the economy revives. Given the inventory position, we expect PCs to be the leading indicator of IT spending recovery. However, we do not believe that there will be a
sustainable cyclical recovery until 2H02. 2H01 will not be a period of economic recovery but a full-fledged recession, which should result in negative unit growth for the PC market in 2001, a first in its history.
During the past year, AMD (#) has slowly made headway against Intel with its powerful Athlon processor. Although AMD gained only a couple points of market share during that period, its gains are greater when measured in
dollars, as Athlon sells for higher prices than AMD's older K6 processors. Athlon caught Intel at a weak point: the tail end of a product cycle. Intel tried to counter Athlon with its aging Pentium III design, but that chip
barely made it to 1 GHz even as Athlon soared as high as 1.2 GHz. Intel brought out the faster Pentium 4 at the end of 2000, but that chip has been expensive and available in only limited quantities since then.
The initial Pentium 4, code-named Willamette, has a relatively large die size, which increases its cost and limits production. Furthermore, Pentium 4 is currently available only with Rambus memory, which itself is expensive
and in short supply. This makes it difficult for Intel to deploy its fast processor against Athlon.
The problem will get better over the course of this year, but it will be 2002 before Pentium 4 really hits its stride. First, Intel is increasing capacity in the 0.18-micron fabs that can build Pentium 4. In fact, the shortfall in PC sales is actually accelerating the transition to Pentium 4.
This is because the fewer chips Intel needs to build, the more capacity it has left over for the large Willamette die.
This summer, Intel will introduce a new chip set, code-named Brookdale, which combines Pentium 4 with low-cost SDRAM memory. While SDRAM will reduce the cost of Pentium 4 systems (compared with Rambus memory), it also
reduces system performance significantly. Some consumers may not notice or care, but others will avoid the SDRAM boxes.
In the fall, Intel will roll out a 0.13-micron version of Pentium 4 known as Northwood. In this next-generation process, Northwood will be fraction of the size of Willamette. This change will reduce Intel's cost to build
Pentium 4 and allow the Company to greatly increase production levels. In addition, Northwood will push Pentium 4's clock speed to 2 GHz and beyond.
Finally, in early 2002, Intel will upgrade Brookdale to support DDR SDRAM. This memory combines high performance with low cost. Northwood systems with DDR SDRAM will offer price/performance well beyond what AMD will have. This
combination should enable Intel to take back some of the market share it has lost to AMD.
Intel is laying the groundwork to gain market share with a huge investment in manufacturing facilities. The Company plans $7.5B in capital expenditures this year and has not trimmed these plans in the face of
falling revenues. This investment is crucial for the transition to 0.13-micron manufacturing and to 300-mm wafers. As noted above, 0.13-micron offers both lower cost and higher speed, an irresistible combination. The
larger 300-mm wafers cut manufacturing costs by an additional 30% or so. Intel underestimated PC demand for 1999 and early 2000. In 2002, the company does not want to be in a similar position and leave market share on
the table. The huge cap ex plan is critical to ensure that capacity is not a limiting factor in 2002 and beyond. With a 6- to 12-month lead over AMD and others in both 0.13-micron and 300-mm wafers, Intel will be the lowest-
cost producer, enhancing its gross margins and giving the Company an edge in any price war.
Intel's 2002 shipments will also be boosted by Microsoft's XBox, which will debut late this year. If XBox is successful, shipments could easily exceed 10 million in 2002. These units will use a low-cost version of Pentium III, reducing the revenue impact, but XBox could still add a nice bump to Intel's revenue stream.
Even without the economic downturn, 2001 was shaping up to be a lackluster year for Intel. We knew that the large Willamette die would reduce Intel's margins and hinder its ability to ramp shipments. The platform transitions
from Willamette/Rambus to Willamette/SDRAM to Northwood/SDRAM to Northwood/DDR will tax the resources of many PC makers, further inhibiting Pentium 4 sales.
But by the start of next year, Intel's platform story will again be strong and the company will be pumping out Northwoods at 2+ GHz. Intel will have a cost and performance advantage over AMD and plenty of manufacturing capacity. If the general economy turns around by that time, Intel will be ready for a rapid turnaround.
Besides the supply-side fix there are other potential demand drivers. Among them include the W2K (Active Directory - TCO, reliability, and stability)
upgrade cycle and the secular trend toward notebooks in the commercial segment. Also the launch later this year of Windows XP Home Edition that blends the stability and reliability of W2K with the consumer-oriented features of the Windows 9x line, should resuscitate consumer demand. However, we do not expect the macroenvironment and the technology cycle to align favorably until 2H02.
No manna will cause the economy to recover in 2H01. The Fed is still restrictive with the Fed funds rate 125 basis points above the two-year bond yield. There is a latency of a year before the full benefits of the monetary policy are realized. The fact is Greenspan started the tightening cycle before the Asian economies had a chance to heal and continued to raise rates for far too long. Economic data has deteriorated sharply in Japan and the banking problems in China and Taiwan are worse than three
years ago. We believe that 2H01 will not be a period of recovery but a full-fledged consumer and manufacturing recession. As the U.S. rolls into a recession, Asia and Europe are expected to follow. We do not believe that
the market has discounted this and it is quite possible that the NASDAQ could significantly undercut the next support at 1800.
With Intel shares down more than 60% from their highs, is it too late to sell? We have seen with Intel and other technology companies that the "E" in P/E has fallen at a faster rate. If we do enter into a recession in 2H01, it is likely that Intel will retest the valuation lows of 1998 (20x TTM P/E), which would take the stock down to the high teens. When we do come out on the other side of this bear market, we should be in a position to "buy" and not "sell on rallies." |
