Intel to Talk Turkey Thursday

Will the chipmaker continue to pour money into capital spending? Investors hope so.
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Intel (INTC) - Get Report doesn't seem inclined to turn miserly, but we'll have a much better idea Thursday.

That's when the semiconductor giant will provide a midquarter update to Wall Street, offering a bit of color on ordering and spending trends. Recent management comments have soothed fears of a steep fourth-quarter earnings shortfall, but investors still want to know just how much the chip giant will spend next year and where its ordering trends are heading. Intel fell 62 cents Monday to $32.04.

The market's view of Intel, as with many big tech stocks, has mostly been rosy this fall, despite the softening economy and worries about consumer confidence. Intel has surged more than 20% since Sept. 10 and is up some 69% from its postattack low, suggesting investors expect that the market for computer chips has turned the corner.

Intel hasn't been wholly dismissive of that view. Last week CFO Andy Bryant told the Credit Suisse First Boston conference that demand has been good so far in the fourth quarter. Meanwhile, PC demand has shown some positive signs since the attacks, albeit at reduced prices;

Hewlett-Packard

(HWP)

is among the computer sellers reporting strong Thanksgiving weekend gains, and

Dell

(DELL) - Get Report

execs recently made comforting noises about component prices.

Wall Street expects Intel to bring in $6.58 billion in revenue for the fourth quarter. When it reported third-quarter earnings in October, Intel predicted a fourth-quarter revenue range of $6.2 billion to $6.8 billion. Since then, estimates have crept up, amid hopes of a slightly stronger-than-expected fourth quarter.

CSFB's Charlie Glavin expects Intel to hit the high end of the revenue range, based on post-Thanksgiving channel checks, though he noted to clients that Bryant's comments were only "cautiously positive." Glavin has a hold rating on Intel. But J.P. Morgan's Eric Chen points to sluggish October and November Intel orders for goods needed to make chips, "suggesting weak output and shipments in November and December." Chen considers Intel a long-term buy, and his firm has not done banking for it in the past three years.

Bryant says Intel plans to continue to invest into the downturn, including spending on computers for its own employees. Market research and news reports have sliced Intel's 2002 capital expenditure plans anywhere from 20% to 40% off this year's $7.5 billion.

Intel's spending dwarfs its competitors' and its ability to spend on equipment is an indicator of the fortunes of capital equipment companies. Additionally, Intel's capital spending outlook hints at the company's expectations for sales in the upcoming year to support those costs. Intel's dominance is especially dramatic this year, as once powerful semiconductor players such as

Motorola

(MOT)

scale back their aspirations and spending to critical items.

That said, Deutsche Banc Alex. Brown's Timothy Arcuri thinks "projections of a 30% or 40% drop are too bearish" at Intel. Arcuri pegs next year's spending at $6.5 billion, but considers the decrease more a factor of big 2001 budgets, rather than a predictor of continuing demand problems in 2002.

"Relatively speaking, Intel has spent a historic percentage of its revenue on capex in calendar 2001," Arcuri says. "There's no way to take a year-view decline as an indication that Intel is slowing down. It's as aggressive or more aggressive in spending money." He does not cover Intel, and his bank has not performed recent underwriting for it.

Shedding light on Intel's purchasing plans, Arcuri believes Intel has slowed its spending to come in on-budget in 2001. He attributes much of the spending to building infrastructure, "buildings, piping, water, etc.," and believes 2002 "when and if demand returns, it can fill up those factories." The Semiconductor Industry Association forecasts 6.3% revenue growth in 2002, but the group is known for accentuating the positive in its outlook.

Investors are now hoping Intel will be doing the same later this week.