Intel falls on downgrade

Intel (Nasdaq: INTC) tumbled Friday after a downgrade from Morgan Stanley Dean Witter & Co.

Shares of Intel were off 3.19 to 38.19, or 7 percent.

Morgan Stanley Dean Witter analyst Mark Edelstone cited sluggish PC demand as a reason for the ratings cut. Dell's (Nasdaq: DELL) disappointing quarterly report helped emphasize the point.

"It's a combination of two things," analyst Mark Edelstone said of the basis for his downgrade in a phone interview with ZDII. "The product transition to Pentium 4 will be challenging, and near-term PC demand is expected to be sluggish."

Edelstone cut his rating on Intel to "neutral" from "outperform." He lowered his Intel profit estimate to 42 cents a share in the fourth quarter from 44 cents. He also sliced 2000 profit estimates to $1.65 a share from $1.75. The average analyst estimate for the year is $1.69, according to First Call.

Based on discussions with semiconductor suppliers, Edelstone said he found scant evidence of an increase in PC manufacturing, despite the upcoming holiday season.

"Some suppliers have already seen adjustments to orders and backlog that are typically made at the end the high season (November)," Edelstone wrote in a research note.

Some Asian companies have seen shipments delayed from Octoboer, and haven't seen the "typical robust production increase" typical of the holiday season.

If PC demand fails to rise soon, the first quarter is likely to also be lower than normal, Edelstone wrote.

Intel also faces stronger competition from Advanced Micro Devices (NYSE: AMD), the analyst said.

He also argued the relatively large Pentium 4 die size presents greater financial challenges for Intel, because the company needs twice as many wafers to produce the same number of Pentium 4s as Pentium IIIs.

Dell's disappointing growth outlook, announced with quarterly results Thursday night, added to evidence that PC demand is slowing.