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Intel's Back, and So Is Edelstone


Merrill Lynch's

Thomas Kurlak losing his touch on


(INTC) - Get Intel Corporation (INTC) Report

? Maybe. For at 87 a share, the stock has regained its footing, investors are starting to believe the worst is finally over and analysts are hopping aboard the industry bellwether once again.

Even as the shares have risen, however, Kurlak -- named as the Intel ax in a


story on April 15 -- has remained downbeat on the chip giant's prospects, even going so far as to issue a fresh warning to Merrill clients Thursday that the risk factor for the entire industry is extremely high right now.

If Kurlak is looking, as he is, increasingly wrong, then who has the right idea? None other than

Morgan Stanley

chip analyst Mark Edelstone. For if the stock continues to soar, his bullish call on Intel will be remembered as the smart one.

That's because Edelstone called for a strong buy on the very same day (April 15) that Kurlak lowered his long-term rating on Intel from buy to accumulate. And for the following two months, it was Kurlak who appeared to be the ax as PC price declines and the

Federal Trade Commission

probe conspired to send Intel's shares to a 1998 low of 65 5/8. But since then, the stock has rallied 27% to its current price.

If anything, Edelstone feels even more strongly today about the company's prospects, reiterating his view, which sets a price target of 110 on the shares.

"We believe the PC inventory correction is in the process of ending," says Edelstone, "and we expect Intel's revenue growth rate to accelerate and its gross margins to expand in the second half." (His firm has participated in an underwriting of Intel put options in the last three years.) Gross margins, he adds, should reach 53% by the fourth quarter, up from 49% in the June quarter.

If Edelstone is right, it will be a remarkable comeback for the Santa Clara, Calif.-based giant, which has watched its revenues erode during the first half of 1998 -- a first in Intel's history. First-quarter revenue fell to $6 billion in 1998 from $6.45 billion in 1997. Second-quarter revenue slipped to $5.93 billion in 1998 from last year's $5.96 billion. In order to post a year-over-year increase in revenue, the chip maker will really have to have blow out revenue targets in the second half. Recall that last year Intel's revenue rose 20%, and the year before that it leapt 29%.

Already, there are signs of a pickup this quarter.

Piper Jaffray

analyst Ashok Kumar said Thursday that the company was off to a strong start, thanks to an increase in sales of its new

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chip for lower-end PCs. "Third-quarter comparisons will represent the first positive year-over-year comparisons in 1998," says Kumar, who raised his third-quarter revenue estimate for Intel to $6.4 billion from $6.2 billion. Other analysts are jumping on board.

Bear Steans'

Andy Neff and

J.P. Morgan's

Terry Ragsdale have recently upped their ratings to buy on Intel.

And yet Kurlak remains downbeat. In fact, he lowered his earnings estimates yet again on the chipmaker July 15. His 1998 earnings per share estimate now stands at $2.78, 28% below the year-ago figure. So far this year, when Kurlak has put out a lower earnings estimate, the rest of the Street has meekly followed.

It's still uncertain whether they will this time. Kurlak is not only sticking with his long-held bearish assessment, but now warning Merrill clients that the risk factor for the entire industry is extremely high right now. "We view the present period as having a higher degree of risk of loss than any period since last February," notes Kurlak.

Even talk out of Intel that it was seeing an increase in chip demand from PC manufacturers isn't fazing him. Kurlak's argument is that, regardless of demand, if PC prices keep falling, it will be very hard for semiconductor producers to suddenly raise their long-declining prices.

The key, Kurlak wrote in his recent note, is that the low-priced PC revolution shows no sign of ebbing. In fact, he believes the shift to low-end PCs will continue. Thursday, Kurlak noted that the sub-$1,000 PCs could account for 50% to 60% of all PC sales within five years. "It seems unlikely that that this sub-$1,000 surge -- having grown from 5% to an estimated 27% in one year -- will simply stop or reverse."

So the stakes are set. While Kurlak handily

won Round 1 of his face-off with Edelstone, it looks like the Morgan Stanley analyst took Round 2.

For the next round, the Morgan Stanley chip analyst sees the company earning 73 cents per share in its third quarter on revenues of 6.13 billion, after recording revenues of $6.16 billion in the year-ago September quarter. For 1998, Edelstone sees the company earning $2.96, which are, for the record, well below his April numbers of $3.25. The analysts' consensus for 1998 earnings is $3.02, down from $3.92 in February, according to


. "There is mounting evidence that everything that touches the PC -- from chip sets to motherboards -- is seeing some form of uptick right now," says Edelstone. "And the roar is only going to get louder." Edelstone believes that fourth-quarter PC demand will be very strong, propelling chip makers such as Intel higher still.

The more bearish Kurlak sees the company earning 69 cents in the September quarter, 19 cents below a year ago.

Back when Intel was trading for around 72 in late May,


asked Kurlak where he saw the stock trading in the near future. "I believe that the stock will stay in this range or go lower over the coming months," he replied. The stock is now trading in the mid-80s.

In a research note Thursday, he writes, "Our analysis leads us to remain on the sidelines, anticipating that consensus to turn negative." If Intel's stock continues to climb, Kurlak may soon have to rethink his Intel strategy.

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