Thursday, July 20, 2006

Color on Intel (NASDAQ:INTC)'s results

Several firms are commenting on Intel (NASDAQ:INTC) following results and guidance announced last night. Opinions vary from side to side. Not seeing any upgrades/downgrades, though:

- Merrill Lynch says nothing from the conference call has changed their view that Intel is at the beginning of a major product cycle. That's enough in their opinion to justify owning the stock for the intermediate term, and the firm remains buyers with a $25 target. Given extremely negative investor sentiment for semiconductor stocks in general, and the stage set for what they believe will be increases in the Philadelphia Semiconductor Index for the remainder of the year, they think that Intel's stock is likely to rise from here.

Intel's management is not doing nearly what it should to rebuild investor confidence. Competitive new products are on the way, which is good, but rather than taking the pain necessary to position itself as well as possible for 2007, Intel's management has instead chosen to prop up margins for the intermediate term by running inventory to extraordinary levels while claiming that nothing is amiss. That's a shame, because the competitive progress that Intel might otherwise show in Q3 is being buried under a mountain of older, less profitable products.

Maintains Buy.

- Friedman, Billings, Ramsey notes Intel posted weak results, as widely expected, and took the opportunity to lower the bar even more than the firm had anticipated, providing more reasonable guidance for 2H06. However, a steep rise in inventory has now, they believe, shifted concerns from slow business conditions and aggressive guidance to the potential for production cuts (and lower margins) later in the year. Moreover, given lowered estimates, INTC is now no longer at a steep discount to the group (at 15x CY07 non-GAAP EPS, essentially the same multiple as TXN). The firm therefore maintains their Market Perform rating, and are lowering price target from $22 to $19 on lower estimates.

- Prudential is certainly among the most bearish saying they estimate that Intel lost 100 bps of revenue share to AMD during the quarter. Firm also estimates cash flow from operations dropped below $1 billion during the quarter. This was not enough to fund capex ($1.5 b), dividends ($582 m) and share repurchases ($1.0 b). Thinks that high inventories of legacy (Pentium) desktop products leave Intel with 2 options that put margins at further risk: 1) write the legacy inventory down, or 2) sell the products at more aggressive price points or risk losing share.

Intel has upgraded its product suite, but has an inventory problem, in firm's view. They think that the stock will drift toward their $14 price target as the company works through its inventories and the Street comes around to the notion that its new normalized gross margins are around 50%, 600 bps below the average over the past 12 years. Reiterates Underweight rating.

- JP Morgan notes they believe Intel will gain share, but they need to see a bottom in gross margins to become more positive on the stock. While the firm is positive on capex cuts and share gains, Intel's record inventory, sluggish demand, and aggressive guidance lead them to believe further downside exists to gross margins. The record inventory is the biggest concern as the last time Intel's inventory was above 95 days, the company's gross margins fell to 37%. Traditionally INTC stock bottoms and peaks with gross margins.

Notablecalls: I think Merrill will prove to be right in the short term. I expect INTC to trade up from here as the big bad event (earnings/guidance) is now behind us. In the intermediate term I think Prudential will be spot on with their $14 tgt. Longer term who knows what may happen. I suspect AMD may have won some battles but will eventually lose the war.


Sharikou, Ph. D said...

Intel is in denial.

That company will soon have no money left to layoff its workers (laying off people needs cash to fullfill contractual obligations), but will be forced into BK.

AMD's massive price cut will deny Intel's oppurtunity to unload its $8.66 billion inventory.

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