For Chips, Nibbles Not Bites

Upgrade on a Miss

According to the Goldman analyst James Covello, Intel is likely to miss its second-quarter financial targets and to guide third-quarter results below Wall Street expectations, which is why he is upgrading the stock.

Covello says Intel is exhibiting all the key signs that it has reached the bottom of a cycle and is due for a rebound. Margins will soon come close to the 47% level reached during Intel's last downturn in 2002, wrote Covello, adding that the company will likely write off inventory and move forward with restructuring actions in the coming months.

And while the market for PC microprocessors is challenging, Covello believes that Intel's forthcoming new line of Core microprocessors will allow Intel to recapture share in every product category except high-end servers.

Covello says the 17x multiple on Intel's full-cycle normalized EPS is in line with the market multiple and well below the 23x price-to-earnings ratio for the rest of the semiconductors covered by Goldman.

"We believe that a company with Intel's market share, long-term growth rate, balance sheet and brand value should trade at a premium to the market multiple on normalized earnings, thus providing valuation upside to the stock," wrote Covello.

Analyst Michael Church, whose firm already owns Intel shares, says he is not in any hurry to add to the position.

Intel's valuation has become attractive, particularly for a company that is the dominant player in a market, says Church. But the recent price war that the company is engaged in with AMD does not bode well.

"I just don't see how anyone wins besides their customers at this point," he says.