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Intel fails to sway market

Despite a fourth quarter that beat Wall Street estimates by a wide margin, Intel shares fell two percent and its rating cut by an analyst.

Despite posting a fourth quarter that beat Wall Street by a wide margin, Intel (INTC) today saw its shares fall as low as two percent and its rating cut by an analyst.

Intel shares fell to close at 142-1/8, down 5 from yesterday's close of 147-1/8, after the company announced that although it posted a stellar fourth quarter, the first quarter would see some slowdown.

Drew Peck, an analyst with Cowen & Company, cut his recommendation to "buy" from "strong buy," citing concerns about the chip maker's first-quarter gross margins and revenues.

He raised his earnings estimate, however, to $8.10 a share for 1997 from $7.80 a share. And he upped his 1998 estimate to $9.25 a share from $9.20.

The company far outpaced Wall Street's estimates due to growing sales in Asia and the Internet boom in the fourth quarter of 1996. The stock has been trending up since the second half of the year and got a further boost early last month when analysts raised their fourth-quarter earnings estimate on the company, citing its robust sales.

But with such an incredible fourth quarter, even Intel said it doesn't expect to meet or exceed its recent performance in the first quarter.

Revenues and gross margins will be flat, compared with the fourth quarter, as the company encounters increased manufacturing costs caused by adding capacity to its plants, said Andy Bryant, chief financial officer.

Intel's gross margin percentage reached 63 percent in the quarter, but is anticipated to fall to around 60 percent in the first quarter. And over the long term, the company expects it to stabilize around 50 percent.

Intel's research and development, manufacturing, and administrative costs are expected to range from four to five percent higher in the first quarter than in the fourth.

But that shouldn't cause worry, according to Gregory Mischou, an analyst with Alex. Brown. He noted that Intel historically has seen more growth in its fourth quarter than the first quarter.

Intel's fourth quarter more than doubled over the year-ago period. Fourth-quarter net profits reached $1.9 billion, or $2.13 a share, for the period ending December 28, up from $867 million or 98 cents a year ago.

Wall Street analysts had expected the chip maker only to post a profit of $1.84 a share for the quarter, according to First Call.

Revenue for the year totaled $20.8 billion, up from $16.2 billion in 1995. Net profits reached $5.2 billion or $5.81 per share, up from $3.6 billion or $4.03 per share in 1995.

Quarterly revenues, which hit a new record, reached $6.4 billion for the three-month period, up 41 percent from a year ago. (Intel is an investor in CNET: The Computer Network.)

The giant chip maker has seen its revenues and profits jump during the quarter and the year, while other chip makers were hit with overcapacity and falling DRAM prices. Intel's outlook further improved during the year as it hit record quarterly revenues, and it saw its stock price increase nearly threefold.

"Intel beat the street across the board, from revenues to gross margins to earnings," said Alex. Brown's Mischou. "This was an outstanding quarter, no matter how you look at it."

The company attributed the results to the rapid growth of the Internet, the penetration of PCs in emerging markets like Asia, and the increased use of PCs as communications devices.

Intel has also announced its board approval of a two-for-one stock split, which is still subject to shareholder approval. And, not to overlook its employees, the company plans to pay a $1,000 bonus to its workers this month.

Among its plans for the year are ramping up production of the multimedia-capable MMX Pentium chip.

Last week, Intel rolled out the MMX chip, which is designed to speed audio, graphics, and video performance. In the second quarter, the company is set to unveil its MMX-enabled Klamath P6 processor, which will be faster than the MMX Pentium.

Intel will also introduce later this year a new multimedia-capable chip for notebooks, code-named Tillamook, which is based on the MMX Pentium. That will be followed by Deschutes, which would be the first MMX P6 processor for notebooks.

But competitors like Advanced Micro Devices (AMD) are rolling out their own version of souped-up chips. AMD recently unveiled a faster version of its AMD-K5 to compete with faster Pentium processors and will later this year begin volume shipments of the K6, which will compete with Intel's Klamath and Pentium Pro.

Meanwhile, ten major chip makers, ranging from Toshiba to Fujitsu, have reportedly established a coalition which may compete with Intel.

The group wants to develop a new high-performance microprocessor architecure for efficient parallel processing by 1998, according to a report in Nihon Keizai Shimbun, a large business publication in Japan.