Analysts part ways on Intel’s 2003 performance

BY DAVID SPEAKMAN

Even though Intel Corp. recently raised its holiday quarter projections due to better-than-expected PC sales, the Santa Clara company still struggles in a love-hate relationship with Wall Street chip analysts.

Despite the recent uptick, San Francisco-based J.P. Morgan analyst Christopher Danely initiated coverage of Intel (Nasdaq: INTC) on Dec. 13 with an “underweight” rating — a way of telling investors to sell.

“Intel remains a company whose growth depends on the slow growth of the PC industry,” Danely says in a report, pointing out PC-related sales made up about 81 percent of Intel’s 2001 bottom line.

He says the recent growth spurt is because companies are replacing older-model PCs and because of pent-up consumer demand.

“Both of which appear to be under [pricing] pressure,” Danely says.

He says Intel will increase its lead in market share over Sunnyvale’s Advanced Micro Devices Inc. (NYSE: AMD) “due to the widening product gap between the two companies as Intel’s latest microprocessor units run at 3.0 GHz versus AMD’s 2.8 GHz.”

“Intel’s gross margin is deteriorating as the company will post consecutive years with margins under 50 percent for the first time in over 12 years,” Danely says, noting Intel’s 2001-2002 return on invested capital was 4 percent, a steep drop from the 22 percent average of the previous 10 years.

“We believe this trend will persist in 2003 due to continued price erosion and slowing growth of the PC market,” says Danely.

But New York-based Deutsche Bank Securities analyst Ben Lynch disagrees.

“After a flat 2002,” he says, “slight improvement is expected in 2003” both for Intel’s gross margin and revenues.

He initiated coverage on Dec. 12 with a “buy” rating and a 12-month target price of $22. Intel has been trading recently in the $17 to $19 range.

Lynch’s pre-market upgrade caused a one-day uptick as the stock opened Dec. 12 at $18.40 a share before closing at $18.20.

But Danely’s sell recommendation the next day knocked the air out of Intel, as it closed the trading week at about $17.60 a share.

Deutsche owns more than 1 percent of Intel stock and provides investment banking services for the company, including a public offering of stock within the past five years.

Calling Intel an “800-pound cash gorilla,” Lynch says he sees 2003 earnings per share of 67 cents — 6 percent above the 63 cents of Wall Street consensus estimates.