Friday, March 09, 2007

Calls of Note Part 2

- Merrill Lynch notes that the central issue for Intel (NASDAQ:INTC) is always gross margin, and the firm recently spent some time with management trying to understand the company's plans. They think that Intel is a lot more interested in reducing AMD to its former status than in showing much gross margin improvement this year. Investors looking for Intel to deliver GM upside are likely to be disappointed.

Intel has bigger plans for 2008, and management clearly hopes to be able to show more meaningful GM improvement. Here's the problem - Intel's plans aren't going to work out unless AMD backs off. AMD may be in a difficult situation now, but it still has a decent product portfolio for this year and enough money to fund its capital spending plans.

The firm does credit Intel with taking a much harder line on operating expenses, and that should allow the company to deliver on their $1.10 estimate this year even as the battle with AMD continues. Intel has historically had difficulty controlling opex during periods of revenue growth, but they think that's changing.

Making money on the stock is going to be tough in the absence of sustainable gross margin improvement, though. The microprocessor business is becoming a duopoly, albeit a lopsided one. Intel's stockholders will be better off when the company's management realizes that and acts accordingly. Maintains Neutral.

Notablecalls: Interesting comments by MLCO's Joe Osha. However given the recent slide in INTC's stock I don't think there will be much of an impact.

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