J.P. Morgan Cuts Intel Estimate

Shrinking market share at Dell(DELL) is causing Intel's(INTC) microprocessors to pile up and could cause the chipmaker to miss first-quarter revenue estimates, J.P. Morgan said in a research note Wednesday.

As a result, J.P. Morgan lowered its estimate of Intel's 2006 earnings to $1.03 a share and warned that "additional potential downside" exists. The brokerage also cited competition from Advanced Micro(AMD) and slowing personal-computer growth.

J.P. Morgan's old 2006 earnings estimate was $1.13 a share, including stock-options expense. It also lowered its 2006 sales estimate to $39.1 billion from $39.5 billion. The Thomson First Call 2006 sales consensus is $41.05 billion.

For 2007, J.P. Morgan now sees Intel earning $1.16 a share on $42.6 billion, down from its old estimates of $1.28 a share and $43 billion. The Thomson First Call 2007 sales estimate is $44.9 billion.

"We believe Intel's inventory is increasing faster than expected while its largest customer, Dell (19% of calendar 2005 revenue), continues to lose market share," the note read. "As a result, we believe Intel could have almost $800.0 million of excess inventory in the first quarter, far above the $300.0 million excess in the fourth quarter of 2005, which adds risk to gross margins. As a result, we believe Intel's days of inventory should increase from 73 days in the fourth quarter to roughly 83 days by the first quarter, above a normal level 65-70 days."

The brokerage noted that Intel's overall market share fell to 77% in the fourth quarter from 81% in the third quarter due to AMD. "We believe AMD continues to gain traction at PC OEMs such as Hewlett-Packard(HPQ) due to the superior price/performance of its products and we expect AMD to increase its overall market share in processors from 18% in calendar 2005 to 22% in calendar 2006," it wrote.

Intel closed Tuesday at $20.60, giving it a valuation that J.P. Morgan considers "troughy," given that it is only about 15 times its 2007 EPS estimate of $1.42 a share before options. The normal valuation range is 15 to 30 times earnings, the brokerage said.

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