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Stock rises on Intel upgrade

An analyst raises his rating on the chip giant to "buy" from "hold," citing an accelerated transition to the Pentium II.

Intel (INTC) received a shot of positive reinforcement today as an analyst raised his rating on the semiconductor giant to "buy" from "hold," citing an accelerated transition to the Pentium II.

Intel shares closed the day at 73-3/4, up 1-3/16 from yesterday's close of 72-9/16.

Today's upgrade is a reversal from the rounds of downgrades the chip maker received after it said last month that its revenues for the March quarter would fall.

"We believe the company will experience a resurgence in unit growth in the second quarter as the market continues its shift to [Pentium II chips] and channel inventory of older Pentium MMX is depleted," analyst Robert Chaplinsky, of Hambrecht & Quist, said today.

He also raised his calendar 1999 earnings estimate on Intel to $3.85 per share from $3.62 per share.

Wall Street has sung Intel's praises as the company introduced faster, more expensive chips, but has showed concern as margins continue to be squeezed on lower-cost personal computer. The lack of a near-term catalyst to move excess inventory also is a concern.

A "buy" rating might be overly optimistic at this point because of such uncertainties, said Ken Pearlman, an analyst at CBIC Oppenheimer.

"[Intel's] is a mixed story," added Pearlman, who maintained his "hold" rating on the company. He noted that while the transition to the Pentium II and the company's design cycle are going well, concerns over margins and pricing cannot be disregarded.

Increases in expenses and write-offs relating to Intel's acquisition of graphics chip firm Chips and Technologies will sink overall gross margin to 53 percent, the company said when it announced last month that revenue would fall 10 percent below earlier projections of $6.5 billion. Fourth-quarter margins came in at 59 percent, a figure that raised some concern in the financial community because, a year ago, Intel's margins were well into the 60 percent range.

The increased visibility of Advanced Micro Devices (AMD) also is spooking investors.

"AMD ramping up psychologically is bothering people. There are also concerns about Intel's new low-end product family that will compete with AMD and Cyrix, which is pretty important," said Pearlman. "If AMD is cheaper and better, then that is not a positive thing for [Intel's] stock, either."

MMX inventory is another serious problem, Pearlman added. "There is no question that there is an inventory problem," with Intel revenues down 10 percent and Compaq's warning that it experienced slower-than-expected sales, pricing pressures, and increasing inventories in the North American market.

Last quarter, excessive shipments built up in sales channels, only to be aggravated by weak sell-through rates that stemmed from a combination of displaced IT funds for the year 2000 and a lack of upgrades or introductions that would propel an upgrade wave.

Pearlman said that problem is not likely to ease during the next couple of months.

"The second quarter concerns me. Product mix is improving, but we are having a hard time finding a near-term driver [to reduce those excess inventories]," he said.

Lower prices helped Intel during the fourth quarter, but not during the first or second quarters, he added, noting that the summer quarter is seasonally slow.

"The first quarter was a pretty slippery slope, [and with the lack of drivers in the coming quarters] we are counting all of our eggs?at the end of the year," Pearlman said.

Last week, the word on the Street about Intel was that its growth was likely to be stagnant for the next year or two, as consumers increasingly traded off faster PCs for lower priced ones, according to Terry Ragsdale, an analyst with J.P. Morgan who initiated coverage on the stock with a "market performer" rating.

Chaplinsky, however, said he expects Dell Computer (DELL) to be bullish in an analyst meeting on Thursday, confirming the PC industry's convergence to Pentium II.

Intel is an investor in CNET: The Computer Network.

Reuters contributed to this report.