Pros and Cons on Intel Shares
—February 22, 2002
Provided By CNBC
Maria Bartiromo/CNBC: Our weekly Vital Signs segment today focuses on Intel. Is now the time to own Intel? Yes, says Joe Osha, Semiconductor Analyst for Merrill Lynch. He joins us live from Kansas City, Missouri. No, says Dan Niles, Semiconductor Analyst for Lehman Brothers. He joins us today from San Francisco. Dan, why don't you like Intel?
Dan Niles/CNBC Guest: It's pretty simple. You had a lot of people building up expectations for a very strong recovery this year. They were all extrapolating off the fourth-quarter numbers, and at the end of day the stock is trading at 30 times calendar 2003 estimates, and you're lucky if the stock is trading in the teens, normally, when you look out a couple of years. So, you know, it's value at a price. With Intel right now, there's no way you can make an argument it's a good value at these levels, especially when it looks like there are some questions surrounding PC demand. The good news is I happen to cover a lot of those companies as well.
Maria Bartiromo/CNBC: What about that, Joe? Are you looking at a weakening in PC demand in the coming months?
Joseph Osha: I think it is a simple story. Several things: First, inventory at end of the fourth quarter was at five-year low levels; secondly, Intel is one of the cheapest stocks in the sector right now; and third, semiconductor stocks move with revenue. So it doesn't really matter if the stock is expensive relative to historic levels. It should track revenue in the first and second quarters. It's gone up since I upgraded it and I think it will keep on going up.
Maria Bartiromo/CNBC: Are you looking for weakness in PC demand in the coming months?
Joseph Osha: No, not particularly. Pricing will be a challenge, but I think PC units this year will probably be in the high single- to low-teens growth.
Maria Bartiromo/CNBC: Dan, I think you have a problem with something Joe said. You are telling me it's expensive. Joe's telling me it's cheap.
Dan Niles/CNBC Guest: It's cheap relative to some of his other names. It's not cheap on an absolute basis.
Maria Bartiromo/CNBC: But if you want to buy a semiconductor stock, it's cheap relative to the other names.
Dan Niles/CNBC Guest: Great, so it maybe will go down less than the rest of them. I personally would rather make money than lose it at a less rapid rate. That's my view on it. Think about it this way. Joe's argument here is if revenues go up and earnings go up, the stock will track it. When you look at eight cents of earnings back on December 6, before they preannounced the quarter, the stock was at 34 3/4, roughly below 35. The stock's today at 30, and they reported fourth-quarter earnings per share of about 15 cents. So its double what people were expecting in print at that time. The stock's gone lower. You've seen that across the board in semis, where they've gone lower off of the January numbers. Look at Xilinx today. They reported huge upside, the stock's up a buck. It hasn't even regained what it lost yesterday. The SOX is pretty much flat, from what I can tell, and after coming straight down. So we'll see what ends up happening, but investors bought these things when revenues were going down in anticipation of a recovery. Now you're getting the exact reverse where you're figuring out, yeah, there's a recovery, but it's not necessarily as strong as you would have hoped.
Maria Bartiromo/CNBC: Joe?
Joseph Osha: The SOX is up 49% off the bottom. I upgraded Intel from a neutral to a buy at 26, it's now at 29, and multiples don't come down from the mountain on a stone tablet, OK? We have very low interest rates right now, and if you look at the past, it doesn't matter, frankly, on an absolute level, what a multiple is. Stocks have tracked revenue. Okay, so what matters to me is not whether my MBA analysis tells me that Intel is expensive relative to where it was 10 years ago. Show me evidence that the stock doesn't track revenue and then I'll believe you. But the reality is it has tracked revenue. That's why I've been right since October, and that's why I'm going to continue to be right.
Maria Bartiromo/CNBC: I just want to point out that, Joe, we realize that you upgraded it, and you definitely made money on the upgrade, but do you buy it now, now that it's 29.39? Dan's point is that it's just expensive at this level.
Joseph Osha: I think you do. If you look at the company's business, they are going to be shrinking the product that amounts to half of their unit volume from a very large die to a smaller die. That has historically correlated with expanding margin. I think Intel is being extremely conservative about the current quarter. They said we had the entire first quarter booked and set a range below that level, and that, historically, is how companies play this game. So I expect upside in the first quarter and, frankly, I think the second quarter will track better than seasonally normal.
Maria Bartiromo/CNBC: We heard both sides. We will let our viewers decide. Gentlemen, good to have you with us. That was Merrill Lynch's Joe Osha and Lehman Brothers Analyst Dan Niles. |
