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

To: Ali Chen who wrote (165985)	6/7/2002 3:22:16 PM
From: AK2004	Read Replies (1) \| Respond to of 186894

01:12am EDT 7-Jun-02 Merrill Lynch (J.Osha (1) 415 676-3510) INTC INTC.N INTEL CORP:Shocker Part 1 ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML INTEL CORP (INTC/OTC) Shocker Joseph Osha (1) 415 676-3510 INTC/$27.00/C-3-2-7 (Part 1 of 2). NEUTRAL Long Term: BUY **************************************************************************** Investors should assume that Merrill Lynch is seeking or will seek investment banking or other business relationships with the companies in this report. ***************************************************************************** Reason for Report: Company Update / Earnings Revision Highlights: o Intel yanked the rug out from under the optimists yesterday with a weak revenue outlook and a surprisingly low gross margin target for the second quarter. o Our numbers were too high - we are taking our current-year estimate from $0.75 to $0.62, and metering our 2003 number down slightly from $0.98 to $0.96. o Despite some likely near-term volatility resulting from Intel's surprise, we expect the stock to trade sideways for the next few quarters. In our view, valuation is too high to support any sustained upside to the stock in the near term given the uncertain demand environment, and our numbers already reflect a second-half upturn anyway. o We reiterate our intermediate-term neutral and long-term buy ratings. Price: $27.00* Estimates (Dec) 2001A 2002E 2003E EPS: $0.52 $0.62 $0.96 P/E: 51.9x 43.5x 28.1x EPS Change (YoY): 19.2% 54.8% Consensus EPS: $0.70 $1.03 (First Call: 30-May-2002) Q2 EPS (Jun): $0.12 $0.12 Cash Flow/Share: $1.26 $1.37 $1.81 Price/Cash Flow: 21.4x 19.7x 14.9x Dividend Rate: $0.02 $0.08 $0.08 Dividend Yield: 0.1% 0.3% 0.3% Opinion & Financial Data Investment Opinion: C-3-2-7 Volatility Risk: Above Average Mkt. Value / Shares Outstanding (mn): $185,247 / 6,861 Book Value/Share (Dec-2001): $5.68 Price/Book Ratio: 4.8x ROE 2002E Average: 10.9% LT Liability % of Capital: 4.4% Est. 5 Year EPS Growth: 15.0% Next 5 Year Dividend Growth: 15.0% Stock Data 52-Week Range: $36.78-$18.96 Symbol / Exchange: INTC / OTC Options: AMEX Institutional Ownership-Vickers: 53.0% Brokers Covering (First Call): 23 For full investment opinion definitions, see footnotes. *Shares of Intel fell $2.75 to $24.25 in after-hour trading. Intel lowers the bar After market close yesterday, Intel lowered its expectations for Q2 from $6.4- $7.0 billion to $6.2-$6.5 billion in revenues, and lowered the gross margin target from 53% to 49%. Although Intel cited weakness in the Europe as the primary reason for the lower numbers, we believe that an erosion in microprocessor product mix, as well as weaker demand elsewhere, is responsible for the miss. We recently cut our Q2 estimates in light of closely watched motherboard and notebook trends from Taiwan, which indicated that the possibility of sequential growth in the June quarter was rapidly disappearing. Clearly, however, we weren't low enough. For the June quarter, we are cutting our revenue target from $6.761 billion to $6.309 billion and lowering our EPS estimate from $0.17 to $0.12. For FY2002, our estimates go from revenues of $28.8 billion to $27.4 billion and from EPS of $0.75 to $0.62. Judging Intel's performance in FY2003 may be a little premature at this point - we are leaving revenues unchanged at $31.8 billion and chipping two cents off our EPS estimate to $0.96. Europe weak, but that's not the only issue Intel noted weaker than expected Europe sales through both OEM and disti channels as the primary reason for revised estimate. Noting that Europe was only 23% of sales in the March quarter, versus 44% in Asia Pac-Japan and 33% in the US, we have a tough time believing that Europe was solely at fault. Rather, we believe that the first two months of the quarter have been soft across all of Intel's key regions, and that a seasonally better June is not enough to make up for the lost ground. MPU ASP erosion impacts Q2 GM Table 1: Changes to MLs Intel Microprocessor Assumptions (mil units, $, $ bil) Actual Old New FY01 Q102 Q202 FY02 Q202 FY02 Celeron 30.0 7.0 7.5 35.0 7.5 35.0 P4 67.5 17.0 17.5 74.5 15.5 67.5 Other MPU 8.4 6.0 5.3 21.8 5.3 21.3 Total Units 105.9 30.0 30.3 131.3 28.3 123.8 ASP ($) $185 $178 $173 $170 $170 $169 MPU Rev ($bil) $19.6 $5.3 $5.2 $22.3 $4.8 $20.9 Source: Merrill Lynch Estimates The company indicated that a shift in microprocessor mix from high margin parts to lower margin parts will likely result in ASPs declining sequentially in Q2. In deriving our new estimates, we've increased shipments of Celeron and decreased shipments of P4 accordingly, as illustrated in Table 1. Our unit assumption for Q2 decreases from 30.3 million to 28.3 million, while our ASP assumption decreases from $173 to $170. We are leaving the rest of our model - Intel's chipset, communications, and server businesses - unchanged, as those businesses appear to be performing as expected. However, we believe the shift to a lower product mix and lower revenue run rates were important motivators behind the 400 basis point decrease in expected gross margins for Q2. Our own model now shows Q2 gross margins at 49.7%. An upturn? Not yet, but the real question is whether it's already baked into numbers Intel indicated that it should have seen signs of a back to school build a week to 10 days ago, but that the upturn has yet to materialize. We don't know whether the upturn will materialize - it's fair to assume that it will - but the question continues to be whether any upturn isn't already factored into numbers. Our estimates show 8% revenue growth in the third quarter and 9% in the fourth, which reflects a fairly upbeat demand assessment. Inventory driven by still-high manufacturing rates may become a problem What's also interesting is that the decline in gross margin does not appear to have been caused by a reduction in manufacturing rates. This raises some questions about the third quarter, as Intel is holding manufacturing rates up despite the weak demand environment, resulting in inventory that will be up again at the end of the second quarter. Bringing that number down will require a combination of price cuts and lower manufacturing output if demand doesn't materialize. With that in mind, it's very hard to make Q3 and Q4 look better than what we're already predicting. Too expensive, too uncertain Even on relatively upbeat Q3 and Q4 numbers, we think the stock is expensive, and it is expensive relative to its own history on our 2003 numbers as well. We'd love to tell investors that we anticipated Intel's problems, but we did not. What we can say, however, is that expensively valued stocks are poorly prepared for surprises like the one Intel delivered yesterday. We would discourage investors from trying to pick a near-term trading bottom to the stock - what matters now is reasonable valuation on reasonable earnings estimates, and the market is still groping for appropriate numbers on both measures.