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Analyst slashes Intel and Dell forecasts

Citing "terrible" PC demand in December and a larger-than-expected slowdown in IT spending, Lehman Brothers cuts its 2001 earnings numbers for both Intel and Dell.

Citing "terrible" PC demand in December and a larger-than-expected slowdown in IT spending, Lehman Brothers slashed its 2001 earnings numbers for both Intel and Dell Computer.

For Intel, analyst Daniel Niles now sees earnings of $1.30 a share, down from $1.40 a share, while his 12-month price target on the stock was reduced from $55 to $40. Niles also cut his 2001 earnings per share for Dell to $1 a share from $1.10 a share.

In early trading, Intel fell 56 cents to $30.50, while Dell slipped 38 cents to $17.13.

In his research note, the analyst said that fourth-quarter PC unit demand and pricing pressure was even worse than previous projections. Both Intel and Dell have warned they would miss estimates for the upcoming quarter due to slumping PC sales.

On the PC front, Niles said the price cuts caused by the unsold inventory of PCs and weakening demand are not having the desired effect on volume growth. "As a result, we believe 2001 will lead to a trade-off between volume growth and profitability, as we saw in 1998 for the PC industry," he noted.

The weakening in global IT spending was a large theme in Niles' note. The analyst said that he now believes global IT spending, which was expected to grow approximately 10 percent in 2001 from about $950 billion last year, is now likely to be closer to 5 percent to 7 percent.

As a result, the slump in Intel's processor business has spread to servers, in Niles' view, with commercial demand showing the most disturbing trends.

"We believe that this is not just a dot-com or small/medium business phenomena but that the spending slowdown is also related to Fortune 500 companies, which are adjusting to their lower growth forecasts by lowering their spending growth rates," Niles wrote.

Regarding the valuation of Intel and Dell, Niles said that the two stocks could continue to fall compared to other companies such as Gateway and Compaq Computer. However, Niles noted that the PC sector as a whole is less likely to be affected on valuation concerns than other areas.