Wednesday, January 17, 2007

Color on results: Intel (NASDAQ:INTC)

Several firms are commenting on Intel (NASDAQ:INTC) after the co reported Q4 results last night:

- JP Morgan says Intel expects a seasonal revenue decline of 4%-10% QoQ in 1Q07 ($8.7-$9.3 billion), above their prior $8.7 billion estimate (down 7% QoQ) due to higher 4Q06 revenue. The company also expects 1Q07 gross margins of 49.0%, above firm's prior 48.0% estimate. However, Intel gave C07 gross margin guidance of 50.0%, below JPM's prior estimate of 51.0%, which they believe was below Consensus.

While they are positive on the restructuring and better products, the firm remains Neutral on INTC due to belief in gross margin downside from excess capacity, higher start up costs, and price competition. They believe Intel could miss its 1Q07 guidance as checks in the PC food chain indicate inventory has increased and business conditions are worsening.

They are maintaining C07 EPS estimate of $1.05 (below Consensus of $1.13) but raising C07 revenue estimate from $37.0 billion to $38.2 billion. Firm is also introducing C08 revenue and EPS estimates of $41.8 billion (up 9% YoY) and $1.35.

INTC is trading at 3.4X C07 sales, below the mid-point of a historic range of 3.0X-5.0X sales. While the stock appears cheap, the firm remains Neutral due to belief of additional estimate cuts driven by lower gross margins. As soon as they believe gross margins are close to bottoming, their outlook on INTC could become more optimistic.

- Morgan Stanley notes Intel's fourth-quarter results make it clear that the company has overbuilt capacity, and despite having a stronger product line, they believe it will be difficult to prevent margin pressure. Given expectations for aggressive price competition, seasonally weak demand, higher-than-normal inventories, excess capacity, and near-term PC-oriented product cycle risk, the frim believes that Intel's near-term earnings risk will remain high.

They look for Intel to undertake aggressive pricing actions As the fourth-quarter data show, Intel has hit AMD where it hurts by snatching server market share and causing its server ASPs to decline sharply. Now that AMD has been wounded and its business model exposed, they expect Intel to continue to be aggressive during the next couple of quarters. Until AMD ramps its Rev G processor into volume in the second half of this year, the firm believes that Intel's overall product portfolio will be strong enough to make AMD vulnerable.

Despite the revenue upside, it appears increasingly clear that aggressive pricing actions and excess capacity will pressure Intel's margins and earnings power this year. While firm's 2007 revenue and gross margin assumptions remain unchanged, they have fine-tuned their well below consensus pro forma EPS estimate lower, from $1.10 to $1.05, as expense reductions are forecast to be less than expected. With gross margin pressure and risk to consensus estimates, they do not think INTC is about to outperform firm's universe.

While long-term valuations are reasonable, margin pressure, earnings risk and slow growth suggest that an Equal-weight rating is appropriate. MSCO expects INTC to find near-term support in the high teens to $20, and would expect to see sellers in the low to mid 20s.

- ThinkEquity's Eric Ross notes that while their initial reaction was to turn more bullish after witnessing Intel's strong Q406 revenue performance, depressed gross margins quickly disappointed them and soured their view. Mr. Ross thinks Q1 and 2007 gross margin guidance is unimpressive, and he believes the possibility of downside to these forecasts exists. However, it is his view that Intel has closed the technology gap with Advanced Micro Devices (NYSE:AMD) remains, and with the only difference now pricing, he expects Intel to regain some lost market share in 2007, albeit, at the expense of margins. Reiterates Accumulate rating and $23 price target.

They believe that Intel gained share back from AMD during the quarter in servers and notebooks, accounting for much of the increase in ASPs at Intel. They also believe ASP from servers drove the gain. Also, a higher portion of sales from the channel resulted in slightly higher ASPs for desktops and servers. Units were a record as they are typically during Q4.

Inventories still at record levels. While Intel reduced inventories during the quarter, they are still near record levels, and the firm believes Intel will need to sell off much of this at some point with a resulting charge.

ThinkEquity does not expect the price competition between Intel and AMD to end anytime soon. They expect a painful, prolonged, aggressive pricing environment throughout at least the first half of 2007. In addition, where they had previously modeled for a return of Intel's gross margins to the mid-50% range, they now expect gross margins to hover around 50% throughout 2007 and perhaps longer.

- Citi notes their primary concern about a weak 1H07 GM outlook was realized predicated on 1) under-utilization charges and 2) 45nm start-up costs. While this forces firm's 2007 EPS estimate lower as they had feared, guidance suggests a strong 2H07 inflection in margins (2Q07E is the bottom), based on the roll-off of 45nm start up charges. They continue to model 2008 well above the Street and anticipate upward revisions to consensus 2008E.

Meanwhile, '07 operating expenses, one of firm's key focal points, are expected to be down 15% y/y supporting an 88% increase in op margin 4Q07E/4Q06. The timing of Intel's improving operating margins has been pushed out, given weaker GMs, but the march toward 30% operating margins continues forward. Particularly given the margin restraints are temporary start-up costs, they remain positive on the shares, despite this setback. Maintains Buy and $26 tgt.

Notablecalls: Think the weakness on gross margin side is going to keep the pressure on INTC stock in the s-t.

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