Semi Nation Divided: Analysts Tussle Over Outlook for Intel and Gang

Intel's(INTC) earnings release has cleaved Wall Street analysts along a clear axis -- highlighting the difficulties in handicapping a sector where visibility is muddy at best. While four brokerages upped their ratings on the company, two others were begging to differ that a bottom was at hand.

The battle lines were drawn. Some think the worst was over and that demand would pick up in the second half. Others say that fundamentals were still deteriorating and that stock prices were too high. There were bottom callers. And there were outright bears.

Prudential Securities' Hans Mosesmann was a bottom caller. He upped his rating on Intel by two notches, moving it from the hollow hold rating all the way up to the stellar strong buy. "Intel is now seeing evidence of normal seasonal demand patterns entering the second quarter for core processor products," he reasoned, telling investors distributor orders and normalizing inventory levels suggest a second-quarter bottom.

And what about that impending price war cited by many bearish analysts? Well, what about it? Mosesmann wasn't convinced. "The bear case of imminent gross margin collapse for Intel or a catastrophic processor price war are not in the cards for this go-around," he wrote.

In This Corner: The Bulls

The reasoning behind Prudential's upgrade -- that things were going to get back to normal in the next quarter or so -- was cited by the other three brokerages that also upped the company. CIBC World Markets put Intel's stock at strong buy from buy, while Bank of America Securities called the company a buy, up a notch from market perform. ABN Amro rated the company at add from hold and placed a $35 price target on its stock -- which closed at $26.04 yesterday.

So, according to Goldman Sachs' Terry Ragsdale it must be time to bust out the Fenders, Jaguars and Flying Vees. Intel's stock is about to kick out the jams. "Although Intel's recent forecasting record leaves something to be desired," Ragsdale wrote this morning, "management's current view supports our PCs-as-first-to-recover thesis, and we expect the stock to rock and roll."

All the positive vibes toward Intel seem a near-term vindication for Salomon Smith Barney's Jonathan Joseph, who issued a buy call on Intel and seven other chipmakers a week ago. It was a bold move that drew jeers from many analysts who argued that it was to early to call a bottom in the semiconductor market -- the genesis for today's diametric opining.

Meet the Bears

According to Lehman Brothers' Dan Niles, who rates the stock a market perform, the real issue was whether demand for Intel's gear was spurred by the rock-bottom prices or because other companies are replenishing their inventories. And based on conversations with brand-name computer makers, Niles said that demand has not yet bottomed -- something that flies in the face of what others said.

Simply put, Niles says Intel's stock is too expensive and price tags a little too low to drive growth. He lowered his 2001 earnings per share estimate to 55 cents from 65 cents and his 2002 estimate to 70 cents from 75 cents. "The question is what sustainable margins are needed to drive growth?" he asked rhetorically. "With a price-to-earnings ratio of about 40 times calendar year 2002 earnings, the stock is not cheap."

Niles had an ally in Credit Suisse First Boston's Charlie Glavin, who rates the stock at hold. Glavin told investors to stay away from Intel as well, citing the wide $6.2 billion-to-$6.8 billion range in second-quarter guidance given by the company. In his is opinion, it's still too early to jump in. "We would avoid chasing the stock as we enter the summer slowdown and while Intel trades at 2-to-4 times trough valuation levels," he wrote. "Even in good times the second-quarter is a traitorous quarter with bad visibility."

And with the two camps rapidly congealing, Merrill Lynch's Joe Osha struck a balance between the two opinions. On one hand, he completely disagreed with the company's assertion that the PC sector was normalizing and entering a seasonal pattern. On the other, he said the bottom was close enough to buy some Intel now. "As an investment, we believe Intel makes sense here, despite our disagreement with the management's short-term view," Osha wrote to investors. "We expect the semiconductor business to bottom over the summer, and we believe we are close enough to that bottom to merit staying with our accumulate rating."

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