Is It Time to Have Intel Inside Your Portfolio?

Intel(INTC) today is hovering slightly above the 52 week low hit yesterday after Salomon Smith Barney said the fourth quarter is shaping up to be the chip-making giant's worst quarter in more than a decade.

The Intel File

Business: makes semiconductor chips for PCs and servers

Flagship product: Pentium family of chips

1999 Revenue: $29.4 billion

1999 Earnings Per Share: $1.16

2000 Estimated Revenue Growth: 17%

2000 Estimated Earnings Growth: 46%

Stock Snapshot

Share Price: $31.75 at Wednesday's close

52 Week Range: $75.81-$31.25

Percentage Change from Jan. 1: Down 23%

Shares Outstanding: 6.73 billion

Source: Baseline, BulldogResearch, Lehman Brothers, Morningstar

So, is the stock a screaming bargain, promising riches as the company rides the success of its forthcoming Pentium 4 in the next few years? Or is Intel the tech equivalent of the best horse-and-buggy maker in 1900 -- meaning its stock has seen its best days and is in for a bumpy road?

That's the question put to fund managers and analysts for this week's Gut Check. The answer: While Pentium 4 represents a great stride forward in the company's semiconductor line, pros are very skeptical about the company's prospects for earnings growth and ability to forge into new, high-growth markets anytime soon.

As one analyst says of the technology bellwether: "Intel is like a Titanic compared to its peers, and turning a ship like that around is hard."

The world's biggest chipmaker is going to have a hard time expanding its business, they say, due to the saturation of the PC market from which Intel derives 80% of its sales. While it is true that Intel intends to expand the remaining 20% of its business into the networking, Internet and wireless arenas, it faces stiff, entrenched competition in each of these areas, fund managers warn.

Intel's earnings have grown 21% a year over the past five years, according to Baseline. For 2000, the consensus Thomson Financial/First Call estimate for Intel's earnings growth is 46%. In 1999, Intel sales were up 11.8% to $29.4 billion, according to Morningstar. Lehman Brothers estimates that Intel's 2000 revenues will reach $34.3 billion, a 16.7% increase for 2000.

Intel's forward price-to-earnings ratio is 19.7, according to BulldogResearch. The last time Intel's P/E ratio hit this range was in 1998, when it fell to 18, according to Baseline. Furthermore, Thomson Financial/First Call expects Intel's earnings per share next year to grow only 1%.

Sensing that Intel's "fundamentals are deteriorating," Scott Schermerhorn, portfolio manager of the Liberty Growth and Income fund, sold off his entire position in Intel in October.

Gut Check on Intel
Pros	Cons
Intel supplies 90% of all of the PC chips in the world.	The PC market has matured.
The Pentium 4 is winning high marks as the chip for a new generation of PCs.	Intel will have a very tough time transitioning into competitive new markets.
Intel earnings have grown 21% a year over the past five years.	Intel's earnings in 2001 are projected to increase only 1%. One analyst says fourth quarter will be Intel's worst in more than a decade.
With a P/E below 20, Intel's a bargain.	Intel's core business no longer justifies growth multiples.
Source: Analysts and fund managers.

The main problem Intel faces is slowing PC sales. Many tech analysts say the computer business is no longer a growth business but a cyclical business. Naturally, this hurts Intel, which supplies the semiconductors to the world's leading computer makers.

"Intel is a great company, but clearly the PC industry is maturing. After two decades of PC unit growth of 18%, we believe it is going to 11%," says John Rutledge, portfolio manager of the Evergreen Technology fund, which currently has about 1% of its assets invested in Intel, Rutledge says.

"The sentiment now among investors is that the PC industry has become a mature business, and Intel will be squeezed," agrees Eli Neusner, director of research at MetaMarkets, whose (OPENX)Openfund has a small position of 9,000 shares in Intel.

"Right now the PC industry is struggling," says Jeremy Lopez, a semiconductor analyst with Morningstar. "Leading up to the third quarter, Intel disappointed investors and had to downgrade earnings," he says.

"Intel has suffered a good bit of earnings contractions this year due to lowered demand for PCs," adds Steve Dube, director of technology research for Wasserstein Perella. In fact, Dube doesn't foresee PC sales picking up next year, either.

Intel Inside Despite growing concerns about the company, a higher percentage of funds own Intel now than at the beginning of the year.
Date	Number of Domestic Funds Owning Intel	Percentage of Funds Owning Intel
Jan. 1	955 out of 2,662	35.9%
Oct. 31	1,123 out of 2,864	39.2%
Source: Morningstar

Companies whose employees might use computers already have all the computers they need, says Fred Hickey, editor of The High-Tech Strategist. While 60% of all households now have computers, this might be all the households that want or can afford them, Hickey says.

While PC sales are falling off, Intel faces increased competition from Advanced Micro Devices (AMD), Lopez says. Last Christmas, Intel couldn't produce chips fast enough for Gateway (GTW), which ended up turning to AMD to meet production, Lopez explains. This has given AMD an edge over Intel in the consumer market, although Intel continues to dominate business computer sales, Lopez says.

On top of this, some analysts point to a slowdown in capital investments in technology and a decline in consumers' disposable income, says Dan Niles, an analyst with Lehman Brothers.

e Believers These funds have made big commitments to Intel.
Fund:	Total % of Fund Assets:	Date of Portfolio:
Matthew 25	9.3	Sept. 30
Tanaka Growth	9.1	June 30
Pitcairn Select Growth	8.7	Oct. 31
Rydex Electronics Investors	8.6	Sept. 30
Strong Dow 30 Value	8.3	June 30
Source: Morningstar

A world of possibilities may await for Intel in laptops, cell phones and the Internet. For now, however, this is a minuscule part of its business, analysts say. Even if Intel aggressively pursued these markets, it is already outgunned by companies like Texas Instruments (TXN) and Motorola (MOT), they say.

Intel spokesman Tom Beermann says the possibility of the Pentium 4 being installed in laptops isn't likely for another couple of years because Intel will first concentrate on getting the next-generation chip up and running in PCs.

Intel is trying to diversify by supplying the chips for Internet servers, networks and cell phones, he adds. "Our objective is to grow these new businesses at 50% a year," Beermann says.

Still, moving into these areas will require fancy footwork, says Kevin Knox, research director of hardware and operating systems at Gartner Group. He observes that networking, Internet server and wireless manufacturers are Intel's key partners, and they won't like Intel encroaching on their turf.

Intel will have to figure out a way to get into these businesses without "disenfranchising its key partnerships," Knox says.

Selling Out These funds have sold big stakes in Intel in recent months.
Fund:	Shares Sold:	Date of Portfolio:
Vanguard U.S. Growth	3,151,000	Sept. 30
Growth Fund of America	2,350,000	June 30
Fidelity Contrafund	1,772,000	June 30
Investment Company of America	1,500,000	June 30
Munder NetNet A	1,275,000	Sept. 30
Source: Morningstar

Finally, while Intel is pinning a lot of hope on its Pentium 4, most analysts believe the chip is so far ahead of today's current Internet connection speeds and so pricey at $2,000 that it will be a long time before the Pentium 4 becomes part of the mainstream. In fact, Intel itself is saying that it doesn't expect Pentium 4 sales to exceed those of the Pentium III until 2002, according to Beermann.

Nonetheless, the fund managers who maintain positions in Intel say they feel compelled to own it because of its large market capitalization and its near-monopoly on computer chips. In fact, roughly 40% of domestic funds tracked by Morningstar owned positions in Intel as of Oct. 31, according to Morningstar, up slightly from 36% of all funds in the beginning of the year.

As Evergreen's Rutledge puts it: "Intel is the largest semiconductor company in the world. You don't want to not own it."

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