Say what you will about securities analysts. But the best of them do their clients a valuable service, cutting through the cacaphony of voices on Wall Street with their incisive commentary and purposive recommendations.
Recent evidence does much to strengthen the thesis that
Banc of America Securities
semiconductor analyst Richard Whittington may not be one of those analysts, however.
Lately, Whittington has been peppering clients with research on
like he's Paul Prudhomme with a mess of etouffe. He started spicing the pot last Wednesday after contract manufacturer
warned that weak demand from PC makers would hurt its bottom line.
PC makers buy the vast majority of Intel and AMD's products. So, thinking that Intel and AMD were exposed to the same problem experienced by SCI Systems, Whittington promptly cut each to market perform from strong buy. Importantly, the ratings change wasn't based on mere valuation. Whittington slashed his earnings estimates on both companies for the remainder of 2000 and for fiscal 2001. (B of A hasn't underwritten for either chip outfit.)
So many in the market were more than a little confused on Tuesday, when Whittington issued two more notes that seemed to directly contradict his new stance on the chip firms. In one piece -- an industry update mysteriously titled "Smooth Air?" -- he wrote that "microprocessor producers indicate solid and 'as expected' business conditions in late September with a 'strong' fourth quarter on the immediate horizon. Whether the third quarter got off slow or not, it appears to be closing well and year-end is approached on a firm note. Our investment thesis remains that of friendly neutrality."
A friendly neutral seems to be another term for "buy," to which Whittington raised both Intel and AMD in the day's second note. There, Whittington wrote that "AMD and Intel continue to register strong demand from PC OEMs thought to remain in an undersupply condition for microprocessors. Since declining over the past week, it is our opinion that the shares of each microprocessor supplier sufficiently discounts potentially slower PC sell-through as well as the potential for aggressive pricing this winter."
So PC demand is strong, not weak. And the chip stocks have been beaten down enough by wrong-headed fears of weak demand (sound familiar?) to justify an upgrade. In addition, Whittington also decided to goose his 12-month price targets on both stocks, despite the fact that he hadn't lowered them the prior week. He upped Intel's target to 70 from 55, and raised AMD's to 40 from 30.
The end result of the week's work: Whittington raised Intel and AMD's price targets while cutting their earnings estimates through 2001 and downgrading them both (from strong buy to friendly neutral).
The Yield Curve
Some of Whittington's colleagues weren't hiding their amusement.
"There's absolutely no substance there," says
U.S. Bancorp Piper Jaffray
analyst Ashok Kumar. "The one from last week, it was like a high school kid was putting out a note. It just discredits the entire industry."
Whittington, busy all day with the
Banc of America Securities Investment Conference
taking place this week in
San Francisco, didn't return calls seeking comment. But he did manage to put out another note before he left the office. The note was dominated by a string of negative factors looming over Intel's third quarter: fears of weaker-than-expected overall unit shipment growth; fears that the company is shipping "fewer Celerons than desired"; and Intel's problems in producing high enough yields of its Pentium III gigahertz processors.
"These remarks are neither too negative nor positive, but are meant to reflect an ongoing stickiness in
Intel's ability to rapidly gin up their production mill to the fastest speed distributions," Whittington wrote in the spirit of neutrality.
It must have been the spirit of friendliness that led him to raise Intel's price target another $5, to $75.