Intel warning blindsides many analysts

Most analysts rated Intel a "strong buy" as the giant chipmaker geared up to report its third-quarter results in October. And a number of those analysts ran to Intel's defense earlier this month, when closely followed U.S. Bancorp Piper Jaffray analyst Ashok Kumar downgraded the company from "strong buy" to "buy."

So Intel's earnings warning yesterday, which blames a Europe sales slowdown, caught many analysts flat-footed. The news not only sent Intel's shares down more than 20 percent this morning, but the bellwether's drop also slammed the tech-heavy Nasdaq.

At least 10 of the 28 analysts who follow Intel lowered recommendations today, moving its overall rating from the "strong buy" category to more of a "buy," said Chuck Hill, a spokesman for research firm First Call/Thomson Financial.

As investors survey this morning's carnage, they may be wondering how so many people whose professions hinge on spotting such trends could be so wrong. Some analysts say they underestimated the market shift to competitor Advanced Micro Devices, while others may have been blindsided because they lack sources in Europe. Still others say PC makers--Intel's customers--gave assurances their industry looked healthy.

"Intel said the problem is the euro, and analysts here in the United States may find it hard to keep their pulse on what is happening overseas," Hill said, adding that analysts also underestimated the impact of the 1998 Asian economic crisis on U.S. companies. "The analysts weren't in front of that one."

Earlier this month, Kumar was the only analyst--of the 28 who follow Intel--to issue a downgrade and maintain that recommendation. Kumar cited weakness in PC sales and noted that slower demand was expected in every region of the world except Japan. He estimated that Europe would drop to single-digit growth from about 16 percent in the first half.

But some analysts question whether Europe is really to blame.

"I'm not convinced that it's a European problem because Intel's customers, like Dell, said they're not seeing any weakness," ABN AMRO analyst David Wu said.

Wu raised his rating to a "buy" from "outperform" earlier this month.

"The downgrades that other analysts had were for PC weakness. But I didn't find that and thought it would be a buying opportunity for investors," Wu said. "What I didn't expect was there would be a market share shift from Intel to AMD."

Richard Whittington, an analyst with Banc of America Securities, initally downgraded the stock after Kumar's move, lowering it to a "market perform" from "strong buy." He cited continued reports that "Intel is falling short of the mark" and would not meet the number of microprocessors it expected to produce in the second half of the year.

But six days later, he upgraded the stock to a "buy" from a "market perform," noting that while he still believed the chipmaker would fall short of its production goals, the stock had fallen to a level that offered investors a buying opportunity, according to a research note.

Analysts now estimate the company will earn around 38 cents a share in the third quarter, down from 41 cents. And they have also lowered fourth-quarter estimates to 43 cents a share from 46 cents. The problems are expected to spill into next year, with analysts dropping their estimate to $1.75 for 2001 from $1.86. Intel is scheduled to report third-quarter earnings Oct. 17.

In one of the more extreme and rare actions taken, Erika Klauer, an analyst with Deutsche Banc Alex Brown, lowered her recommendation today to "market underperform," or essentially a "sell," from "strong buy." Klauer said the earnings warning clinched other doubts she had about the company's future, citing increasing competition, product delays and gross margins that will be difficult to maintain.

"To go to a 'sell' is unusual. But to go to a sell from a 'strong buy' is extremely rare," Hill said.