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Intel's weak results affect markets

After announcing weaker-than-expected results and receiving a number of earnings cuts from analysts, Intel's stock tipped back and weighed down the Nasdaq.

    After announcing weaker-than-expected results for the September quarter and receiving a number of earnings cuts from analysts, Intel's (INTC) stock tipped back and weighed down the Nasdaq.

    The stock opened today at 85-9/16, down 6-1/4 from yesterday's close of 91-13/16. But it regained some of the losses, ending today at 86-11/16. About 66.3 million shares traded hands, making Intel the mostly actively traded security on the Nasdaq today.

    Early on, the Nasdaq lost about 20 points, but quickly regained some of the losses to end the day down about 9 points. The Dow Jones Industrial Average fell about 60 points, but it too regained some losses, ending the day down 38 points.

    Intel reported after the markets closed yesterday that a much weaker-than-expected flash memory market was the reason for falling short of expectations. But analysts were quick to counter that the shortfall actually was based on the cost of rolling out a new product line and aggressive price cutting.

    Nevertheless, the company's outlook is positive. "There isn't anything keeping them from moving forward," said David Thor, an analyst with Boston Equity Research Group.

    Thor said that the falling technology stock is "an intra-day hiccup," and that, if anything, investors should take this as a buying opportunity, since Compaq Computer's (CPQ) results tomorrow will boost falling tech stock prices.

    "There is pricing pressure on the PC manufacturers, but there is no pricing pressure on Intel," Thor said. "The acceleration for sales of sub-$1000 PCs and higher margins on enterprise machines is so great, it should outweigh any pricing pressure."

    But not everyone is so optimistic. Charles Boucher, an analyst at UBS Securities, agreed that today's pullback presents a nice buying opportunity for the long-term investor. He said there won't be much upside surprise in the coming months.

    Boucher noted that there is some debate over sub-$1000 PCs, which have 133 megahertz to 166 megahertz speed microprocessors and lower profit margins, because there are not many shipping in the corporate market.

    He said he expects Q4 prices to stabilize or recover as Intel ships faster chips with better margins. It will be shipping two products: the Pentium II and MMX.

    There is still a heavy mix of PCs in the consumer marketplace. The corporate market is 200+ and Pentium II is also important in the corporate market. Boucher warns to expect a doubling of Pentium II, but a decline in MMX, because so many were shipped during the third quarter that there is a supply already in the channel.

    "This is a tough time for Intel and a difficult time for chip makers in general?. There is a lot of pricing pressure and competition in the MMX with AMD and Cyrix," Boucher said. "Intel tends to represent a proxy for the semiconductor industry."

    Boucher explained that Intel always has rockier financial performance when transitioning from one product to the next. Aggressive price cuts in the 40 percent to 50 percent range caused average prices on processors to decline, but they were partly offset by increased unit shipments. The company is not expected to make hard price cuts in November.

    Intel posted net profits of $1.57 billion, or 88 cents a share, for the quarter ended September 30, compared with $1.31 billion, or 74 cents, a year ago. But analysts had expected the chip giant to post earnings of 91 cents, according to First Call.

    Bruce Walicek, an analyst with BT Alex. Brown, said in a report today that he is lowering his 1997 earnings per share estimate to $3.88 from $3.96, and cutting his 1998 per share estimate to $4.70 from $4.75. He added, however, that a strong Pentium II product cycle could drive revenue and earnings upside in 1998. Walicek also reiterated his "buy" rating on Intel shares.

    Boucher agreed that 1998 has a lot of potential, and that Q4 will present a better picture.

    "There will be no sustained positive move [in the stock] until we get into 1998. Q4 isn't going to be a home run," Boucher said. "At the end of the year, if there is a clean inventory, then expect a good recovery in business in Q1. But excess inventory at year end will [mean that it will] take at least another quarter to recover."

    Boucher added that, while Compaq is likely to report a strong quarter, Compaq and Dell Computer (DELL) aren't a proxy for the PC market. "You get a better flavor for the overall PC market by looking at Intel," he said.

    Volpe Brown Whelan and PaineWebber downgraded Intel to "neutral" from "buy."

    (Intel is an investor in CNET: The Computer Network)