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Monday, July 08, 2013 4:01:48 PM
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12:04 PM
Intel: Evercore Says Sell, Citi Sees Further PC Slump, Bernstein Ponders Capex
By Tiernan Ray
Shares of Intel (INTC) are down 85 cents, or 3.5%, at $23.21, following a couple of negative notes today based on a perceived weakening of the personal computer market, and also worries that Intel may cannibalize its sales of desktop and laptop microprocessors with sales of cheaper “Atom” mobile chips.
Patrick Wang of Evercore Partners cut his rating on the shares to Underweight from Equal Weight, and cut his price target to $20 from $22, writing that cannibalization of PCs by tablet computers and a breakdown of demand in emerging markets will produce a 10% decline in PC unit shipments this year, worse than the 6% decline he’d previously forecast.
Intel’s progress in tablets — it recently won the deal to power Samsung Electronics’s (005930KS) “Galaxy Tab III” tablet computer — won’t offset the deleterious effect of lower prices:
We’ve been cautious on the LT story for some time and can no longer look past our structural concerns. Current PC trends are weakening and could result in a >10% YoY unit decline this year with no inflection in sight. More importantly, we see ASP challenges ahead as mgmt capitulates on Atom in PCCG and somewhat in DCG. Even assuming healthy GMs on Atom, the combination of cannibalization and ASP reduction will result in less overall profit dollars. Further, we don’t expect share gains in tablets and smartphones to be material to 2014 EPS. Clearly, things are in motion at Intel with CEO Krzanich reorganizing businesses, reupholstering the core business, and carefully structuring foundry plans. Looking ahead, we believe the Fall Analyst Day could serve as a potential catalyst with new leadership sharing their vision and perhaps providing an update to the financial model.
Wang cut his estimate for this year for Intel to $52.8 billion in revenue and $1.80 per share in net profit from a prior $53.2 billion and $1.85. For 2014, he projects $54.6 billion and $1.90, down from a prior $55.25 billion and $1.98.
Wang notes that a decline in EPS to $1.90 this year from $2.13 last year would be the second year in a row of profit decline in the last decade, and offers the following chart:
Evercore Intel Earnings Record July 2013
Glen Yeung of Citigroup, meanwhile, writes that “as we begin the second half of 2013, growth remains elusive” for the semiconductor group as a whole.
Yeung, who has a Hold rating on Intel shares, and a $24 price target, writes that a bounce in Q3 from sales of Intel’s Haswell won’t be able to offset the effect of a weakening PC market, and he cut his full-year estimate for Intel to $52.27 billion in revenue and $1.80 in profit from a prior $53.1 billion and $1.82:
It will come as no surprise to investors that the PC environment is still weak: notebook ODM sales have been below plan; China demand has been poor; and the supply chain has been prone to disappointment (e.g. ASUS, TPK). Consistent with this, checks suggest Intel’s demand to its back-end suppliers was flat to down 5% in 2Q13. While this may be attributable to inventory work down ahead of broader Haswell/Bay Trail builds, in light of the broad PC industry weakness, we suspect it portends weakness in Intel’s 2Q13. As such, we lower our 2Q13 revenue growth estimate to flat (guidance -1.4% to +6.5%), implying sales of $12.6B, below consensus of $12.9B. For 3Q13, we retain our growth estimate of 6.4% (consensus 6.6%, seasonal 7.4%), contemplating the “sell-in” benefit of Intel’s new products despite a still weak end-market; this implies a reduction from $13.7B to $13.4B. For 4Q13, we increase our growth estimate from 1.4% to 2.0% (consensus 4.1%, seasonal -1.2%), reflecting a modest degree of optimism around Intel’s new product suite (including Bay Trail tablets), albeit still implying an estimate reduction ($13.7B from $13.9B) and still well below consensus ($13.7B vs. $14.3B). While dividend yield and optimism around Intel’s opportunities in tablets and handsets limit downside, we find it difficult to believe INTC shares will breakout to the upside in light of the poor PC environment and negative estimate revisions—we remain on the sidelines with respect to INTC shares at this time.
On a slightly less negative note, Bernstein Research‘s Stacy Rasgon, who has an Underperform rating on Intel stock, and an $18 price target, suggests Intel could do a little better than expected if it can exploit higher yields in its factories from Atom chips and thus minimize its capital investment:
This dynamic could suggest one further potential strategy for Intel to follow in such a scenario – namely, cutting capex to reduce the rate of capacity growth […] We continue to find potential for revenue and EPS downside in the event of heavy self-cannibalization. However, a good fraction of the earnings shortfall does stem from under-utilization, hence non-cash depreciation. Thus, IF Intel can achieve the higher pricing for Atom they are seeking (say, $45/part, rather than the historical $25 or so), it could happen that operating cash flow would decline less than their wafer starts. This could suggest that the company could bring down capex more than operating cash flow, allowing FCF to be supported (or even increase a bit) if Atom chips self-cannibalize in heavy numbers […] That being said, we continue to see significant risks to the stock during the transition as 1) for the moment, Intel is pursuing the opposite strategy of BUILDING out capex in an attempt to capture incremental unit growth (we’ll see what they do with that next week at their earnings) and 2) the potential still exists for stagnating or declining revenue/earnings even in a “positive” scenario. We remain Underperform on the name.
http://blogs.barrons.com/techtraderdaily/2013/07/08/intel-evercore-says-sell-citi-sees-further-pc-slump-bernstein-ponders-capex/
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