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Analysts agree to disagree on Intel&#039s future

Lower than expected earnings and bullish forecasts for the second half left Intel Corp. (Nastaq: INTC) shares relatively unchanged Wednesday, rising 1 3/16 to 66 9/16. Analysts, however, agreed to disagree on Intel's prospects.

On Tuesday Intel reported second quarter earnings of 51 cents a share, 2 pennies below First Call consensus. That earnings miss, however, was cushioned by expectations for a strong second half.

Here's a round-up what Wall Street analysts were saying about Intel's future:

Merril Lynch analyst Joseph Osha reiterated a "buy" rating on Intel's upbeat forecasts for the second half of 1999, though Intel reported earnings at 51 cents a share, below Merrill Lynch's expectations of 55 cents a share, and revenues undershot expectations as well.

Osha lowered his 1999 earnings estimates from $2.41 to $2.37 "to account for the low Q2 result," but Osha maintained a price objective of $86. Because "Intel did a good job of controlling costs during the quarter, holding gross margins at 59 percent," Osha raised Intel's gross margin target for all of 1999 to 60.5 percent.

Tad Lafountain, an analyst with Needham and Co., was bearish. "Dubious guidance" is what he calls Intel's positive forecast for the second half. Intel wasn't overly bullish on the third quarter, and "there's no evidence that the fourth quarter would be gangbusters," he said. Cost cutting can't improve the margins, only protect them, he said.

LaFountain said Intel will need revenue growth, especially when competitor Advanced Micro Devices (NYSE: AMD) puts its K-7 chip, the Athlon, on the market. Lafountain emphasized the execution delays on the Camino chipset, 3 months behind, and the Merced, which has been pushed back. He said he can't understand why they have such a big market capitalization compared to AMD. "Of course, sitting on 13 billion in cash and investments, they're going to be willing to endure a lot of pain," he said. LaFountain is one of the few analysts with a "buy" rating on AMD.

Dan Scovel of Fahnstock & Company, who has been one of the less bullish on Intel, says there are two things Intel's report confirms: The PC market is weak, and Intel knows how to protect profitability in a weak market. Though he predicts most will focus on the "strong second half" refrain in Intel's earnings release, Scovel questions the back-loading of all that bullishness into the fourth quarter. Though the fourth quarter is seasonally the strongest, "we were surprised they weren't more bullish for the third quarter."

Fahnstock & Co. has bumped up their estimates 6 cents to $2.32 for 1999, and 12 cents to $2.50 for 2000, but continues to rate Intel a "hold." In regards to the K-7, it looks good on paper, and the best thing Intel can do is throw a screwdriver into the delivery line, or just sit there and lose a little market share. "If they start a price war, it would mean a serious loss to the bottom line," he said.

Kurt Lanzavecchia, an analyst at C.E. Unterberg, Towbin, said the stock could go strong even though the earnings number was a little on the "light" side. He doesn't see any execution problems for Intel down the pipe, and sees seasonal pick-ups and product transitions coming at a good time considering share gain over AMD.

"There's two sides to the K-7 coin," he says of AMD's high end Athlon chip. "It looks good on paper, but they have to manufacture it," and at a price that will allow profitability. The transition from Pentium II to Pentium III should also be a boost for Intel, since product transition usually means a pick-up in volume. Lanzavecchia maintains a "buy" rating on Intel.

ABN AMRO also announced Wednesday that it cut its rating on Intel to outperform from buy, and slashed its 12-month price target on the stock to $73 from $78. ABN AMRO also lowered its 1999 earnings estimate to $2.30 a share from $2.45. "We now think it is prudent not to use aggressive projections during the period of Intel's repositioning itself as an Internet infrastructure supplier because of likely short-term dilutive investments via acquisitions or internal development in newer, less profitable markets," ABN AMRO said in a press release.