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Analyst reports: Intel warning shocks, confuses Wall Street

Analysts respond with a mixed bag of downgrades and upgrades a day after Intel warns of an earnings shortfall pegged to slumping demand for personal computers.

Analysts responded with a mixed bag of downgrades and upgrades Friday, a day after Intel warned of an earnings shortfall pegged to slumping demand for personal computers.

Experts at Wall Street financial institutions admitted they were unsure about whether Intel's stock price had bottomed out, and they cautioned all but the most risk-loving investors to hold off on buying more shares. Wall Street's only consensus, it seemed, was that the earnings warning was bleaker than they had anticipated.

The Santa Clara, Calif.-based company, which makes computer-related products such as microprocessors and chipsets, cut its outlook for fourth-quarter nonoperating income from about $950 million, or 9 cents per share after taxes, to $675 million, or 7 cents per share after taxes.

Based on a severe fall in the personal computer market and a cooling U.S. economy, Intel executives also warned that quarterly revenue growth is likely to be flat. Previously, the company projected revenue growth would be in the 4 percent to 8 percent range.

The company also lamented a significant drop in production of notebooks and motherboards in Taiwan and higher inventories of chipsets. And it expects the amount of money it makes from interest income and sales from its investment portfolio to be $275 million below prior expectations because of the declining value of many technology stocks.

The only bright spots that executives highlighted in the dour conference call on Thursday were Japan and China, where consumer PC sales are brisk. They also were grateful for the strong market for flash memory, which remains robust because of surging demand for handheld computers and other non-PC devices.

Intel executives said Thursday after the close of regular stock trading that over the past three weeks they have seen "increasing negative signs" as well as larger order cancellations from a number of major customers.

"As it has turned out, the economy worldwide appears to be slowing more quickly than we anticipated," said chief financial officer Andy Bryant.

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Analysts had been bracing for a shortfall for months, as Gateway, Apple Computer and other industry bellwethers warned that fourth-quarter earnings would be disappointing. But few were ready for the overwhelmingly bleak tone of the Intel conference call.

Merrill Lynch analyst Joseph Osha reiterated his tepid "accumulate" rating and said the lowered estimates were worse than his most conservative expectations. He revised his fourth-quarter earnings estimate to 38 cents from 43 cents per share. He dropped his earnings estimate for calendar year 2001 to $1.56 per share from an "already conservative" $1.64 per share.

"We were frankly surprised--although we knew that the desktop and notebook PC businesses were weak, we believed that ongoing strength in the server microprocessor and flash businesses would be sufficient to get Intel to 5 percent-7 percent revenue growth sequentially," Osha wrote in a research note issued Friday morning with the brusque title "Flat..." He called the quarterly estimates "the worst performance in six years."

Salomon Smith Barney analysts Jonathan Joseph and Dunham Winoto lowered their 2001 nonoperating earnings estimate from $3.2 billion to $2.4 billion, "given the poor performance of (Intel's) portfolio, heavily sprinkled with 'dot-coms.'" The analysts said it will be tough for Intel to make money when many of its e-commerce clients are suffering from bankruptcies, layoffs, revenue shortfalls and closures.

Struggles continue
The company has been struggling to meet Wall Street's lofty expectations since midyear. On Sept. 11, Intel said revenue for the third quarter was likely to be only 3 percent to 5 percent higher than second-quarter revenue of $8.3 billion--a shockwave that sent Intel shares sliding about 20 percent and sparked a series of analyst downgrades.

Because many financial institutions had already downgraded the company, numerous analysts lowered earnings estimates and 12-month target prices on Friday but reiterated unenthusiastic ratings. Deutsche Banc Alex Brown maintained its "underperform" rating, and Chase Hambrecht & Quist maintained a "market perform" rating.

Analyst Joe Moore at Goldman Sachs maintained his "market outperform" rating and cut his fiscal 2000 earnings estimates from $1.69 per share to $1.65 per share. He slashed fiscal 2001 earnings estimates from $1.80 to $1.55 per share.

John M. Geraghty at Gerard Klauer Mattison reiterated his "buy" rating but slashed fiscal 2000 earnings estimates from $1.70 per share to $1.65 per share. He cut fiscal 2001 earnings from $1.78 per share to $1.60 per share.

David Wong at UBS Warburg maintained his "buy" rating but slashed his 12-month price target to $40 from $54. He also lowered his fiscal 2000 earnings estimates from $1.68 to $1.64 and fiscal 2001 earnings estimates from $1.67 to $1.54.

Others cut their ratings. ABN AMRO downgraded Intel from "add" to "hold."

Chance for rebound?
A few firms thought the warning signaled a new low point for Intel that will slowly rebound over the next several quarters. CIBC World Markets upgraded the company from "hold" to "buy."

Intel stock traded at $33.94 Friday morning, up 5 percent from its closing price on Thursday. The stock, among the most favored tech companies on Wall Street for most of the late '90s, is down 17.5 percent since the beginning of the year. It has traded in a 52-week range of $31.25 to $75.81.

Robertson Stephens analyst Eric Rothdeutsch cut fiscal 2000 revenue estimates and earnings-per-share estimates from $34 billion and $1.66 per share to $33.8 billion and $1.63 per share. He slashed fiscal 2001 revenue estimates from $38.5 billion and $1.70 per share to $37.5 billion and $1.55 per share.

Although he acknowledged that the stock has slid dramatically in recent weeks, he hesitated to recommend it to anyone except the most high-risk bargain hunters. He maintained his long-term accumulate rating on Intel but lowered his 12-month price target from $45 to $40, or 26 times the estimated fiscal 2001 earnings per share forecast of $1.55.

"Although this pre-announcement brings clarity to the near-term business environment facing Intel and could allow the stock to find a bottom, we continue to remain cautious pending better visibility into some sort of pickup in overall PC demand, improved motherboard build rates, and lower chipset inventories," Rothdeutsch wrote in a research note issued Friday.