Prudential cut Intel ( INTC) to underperform Wednesday and slashed its price target as part of a negative call on the semiconductor sector.

"On a P/E basis, Intel appears to be one of the cheapest stocks in our universe of coverage," Prudential wrote. "However, we think the company faces a number of near- and intermediate-term challenges that could result in disappointing top-line and margin performance over the next two to four quarters."

Intel faces decelerating notebook and personal computer revenue growth, no operating system catalyst in 2006, rising competition from Advanced Micro Devices ( AMD) and a shift to lower-end CPU sales, the brokerage warned.

"We don't expect the company's momentum to turn until late 2006, and expect the stock to underperform for the next six to 12 months," Prudential wrote.

The brokerage lowered its price target on Intel to $20 from $31, reflecting a multiple of 14 over its 2006 earnings estimate of $1.45 a share. That estimate was cut from its previous forecast of $1.67 a share. The Thomson First Call consensus for Intel's 2006 earnings is $1.60 a share.

Intel was recently down 34 cents, or 1.5%, to $23.08.

Regarding the broader semiconductor sector, Prudential cut its outlook to unfavorable from neutral, saying gross margin forecasts for 2006 are at risk.

"We expected that lean supply chain inventories and tight capacity utilization would have led to positive results and upside surprises broadly across the component sector this earnings season. However, our initial read on the component vendor preannouncements indicates worse than expected results, and raises the risk of a weaker than seasonal demand environment," Prudential said.

While dour on semiconductors as a whole, Prudential singled out AMD, Broadcom ( BRCM) and Texas Instruments ( TXN) as likely beneficiaries of favorable product cycles.

Prudential doesn't do investment banking.

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