Is It Time to Have Intel Inside Your Portfolio?

Intel

(INTC) - Get Report

today is hovering slightly above the 52 week low hit yesterday after

Salomon Smith Barney

said the fourth quarter is shaping up to be the chip-making giant's worst quarter in more than a decade.

So, is the stock a screaming bargain, promising riches as the company rides the success of its forthcoming

Pentium 4

in the next few years? Or is Intel the tech equivalent of the best horse-and-buggy maker in 1900 -- meaning its stock has seen its best days and is in for a bumpy road?

That's the question put to fund managers and analysts for this week's

Gut Check

. The answer: While Pentium 4 represents a great stride forward in the company's semiconductor line, pros are very skeptical about the company's prospects for earnings growth and ability to forge into new, high-growth markets anytime soon.

As one analyst says of the technology bellwether: "Intel is like a Titanic compared to its peers, and turning a ship like that around is hard."

The world's biggest chipmaker is going to have a hard time expanding its business, they say, due to the saturation of the PC market from which Intel derives 80% of its sales. While it is true that Intel intends to expand the remaining 20% of its business into the networking, Internet and wireless arenas, it faces stiff, entrenched competition in each of these areas, fund managers warn.

Intel's earnings have grown 21% a year over the past five years, according to

Baseline

. For 2000, the consensus

Thomson Financial/First Call

estimate for Intel's earnings growth is 46%. In 1999, Intel sales were up 11.8% to $29.4 billion, according to

Morningstar

.

Lehman Brothers

estimates that Intel's 2000 revenues will reach $34.3 billion, a 16.7% increase for 2000.

Intel's forward

price-to-earnings ratio is 19.7, according to

BulldogResearch

. The last time Intel's P/E ratio hit this range was in 1998, when it fell to 18, according to Baseline. Furthermore, Thomson Financial/First Call expects Intel's earnings per share next year to grow only 1%.

Sensing that Intel's "fundamentals are deteriorating," Scott Schermerhorn, portfolio manager of the

Liberty Growth and Income

fund, sold off his entire position in Intel in October.

The main problem Intel faces is slowing PC sales. Many tech analysts say the computer business is no longer a growth business but a cyclical business. Naturally, this hurts Intel, which supplies the semiconductors to the world's leading computer makers.

"Intel is a great company, but clearly the PC industry is maturing. After two decades of PC unit growth of 18%, we believe it is going to 11%," says John Rutledge, portfolio manager of the

Evergreen Technology

fund, which currently has about 1% of its assets invested in Intel, Rutledge says.

"The sentiment now among investors is that the PC industry has become a mature business, and Intel will be squeezed," agrees Eli Neusner, director of research at

MetaMarkets

, whose

(OPENX)

Openfund has a small position of 9,000 shares in Intel.

"Right now the PC industry is struggling," says Jeremy Lopez, a semiconductor analyst with Morningstar. "Leading up to the third quarter, Intel disappointed investors and had to downgrade earnings," he says.

"Intel has suffered a good bit of earnings contractions this year due to lowered demand for PCs," adds Steve Dube, director of technology research for

Wasserstein Perella

. In fact, Dube doesn't foresee PC sales picking up next year, either.

Companies whose employees might use computers already have all the computers they need, says Fred Hickey, editor of

The High-Tech Strategist

. While 60% of all households now have computers, this might be all the households that want or can afford them, Hickey says.

While PC sales are falling off, Intel faces increased competition from

Advanced Micro Devices

(AMD) - Get Report

, Lopez says. Last Christmas, Intel couldn't produce chips fast enough for

Gateway

(GTW)

, which ended up turning to AMD to meet production, Lopez explains. This has given AMD an edge over Intel in the consumer market, although Intel continues to dominate business computer sales, Lopez says.

On top of this, some analysts point to a slowdown in capital investments in technology and a decline in consumers' disposable income, says Dan Niles, an analyst with Lehman Brothers.

A world of possibilities may await for Intel in laptops, cell phones and the Internet. For now, however, this is a minuscule part of its business, analysts say. Even if Intel aggressively pursued these markets, it is already outgunned by companies like

Texas Instruments

(TXN) - Get Report

and

Motorola

(MOT)

, they say.

Intel spokesman Tom Beermann says the possibility of the Pentium 4 being installed in laptops isn't likely for another couple of years because Intel will first concentrate on getting the next-generation chip up and running in PCs.

Intel is trying to diversify by supplying the chips for Internet servers, networks and cell phones, he adds. "Our objective is to grow these new businesses at 50% a year," Beermann says.

Still, moving into these areas will require fancy footwork, says Kevin Knox, research director of hardware and operating systems at

Gartner Group

. He observes that networking, Internet server and wireless manufacturers are Intel's key partners, and they won't like Intel encroaching on their turf.

Intel will have to figure out a way to get into these businesses without "disenfranchising its key partnerships," Knox says.

Finally, while Intel is pinning a lot of hope on its Pentium 4, most analysts believe the chip is so far ahead of today's current Internet connection speeds and so pricey at $2,000 that it will be a long time before the Pentium 4 becomes part of the mainstream. In fact, Intel itself is saying that it doesn't expect Pentium 4 sales to exceed those of the Pentium III until 2002, according to Beermann.

Nonetheless, the fund managers who maintain positions in Intel say they feel compelled to own it because of its large market capitalization and its near-monopoly on computer chips. In fact, roughly 40% of domestic funds tracked by Morningstar owned positions in Intel as of Oct. 31, according to Morningstar, up slightly from 36% of all funds in the beginning of the year.

As Evergreen's Rutledge puts it: "Intel is the largest semiconductor company in the world. You don't want to

not

own it."