Intel Takes the Mantle of Tech Stock to Watch

In the wake of Compaq's bleak forecast, investors look to the chip giant's earnings for a sign.
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SAN FRANCISCO -- Chip investors will be listening closely this afternoon for proof from Intel (INTC) - Get Report that whatever is ailing computer maker Compaq (CPQ) isn't hurting the world's largest chipmaker.

Compaq's earnings warning, released Friday, gave chip investors the jitters Monday, driving the

Philadelphia Semiconductor Index

down 5% for the day and Intel down 7%. A slowdown at Intel isn't a novel idea: Some analysts have been warning of one for some time. In early March, both

Donaldson Lufkin & Jenrette

and

NationsBanc Montgomery

downgraded the Santa Clara, Calif., company's stock, citing worries about slower PC sales and competition.

At the time

BancBoston Robertson Stephens

analyst Dan Niles said people were just holding off buying PCs until after the release of the high-powered Pentium III chip, but that was before reports circulated of lackluster sales of the P3. Compaq's warning Friday made even Niles nervous enough to cut his rating on Intel to long-term attractive from strong buy. (None of the analysts cited in this story have underwritten for Intel.)

At

RSS Investment Counsel

, which manages about $265 million in individual accounts, fund manager Eric Linser said he lightened up on the fund's Intel stake at the beginning of the year, citing concerns about slower sales in the PC market, although the stock remains one of the fund's largest holdings. He doesn't expect to buy again until later in the year because he believes people will hold off all purchases until after they test their systems for Y2K readiness. "There is just too much unknown out there," Linser said. "We first have to get through this typical PC slowdown."

He believes that companies will delay the purchase of any new computers until after the turn of the millennium to ward of that Y2K bug.

The

First Call

consensus of 32 analysts predicts Intel will earn 55 cents a share, up from 41 cents a year ago but down from 60 cents in the fourth quarter. Among the 32 analysts, estimates range from 51 to 57 cents. The so-called whisper number, an unofficial target set by the Street, calls for slightly better earnings of 58 cents a share.

But even the bears say there's room for good news. William Milton, an analyst with

Brown Brothers Harriman

who has had a long-time neutral rating on the stock, said he expects disappointing revenue growth, but profit margins could be good depending on the impact of cost-cutting measures. Milton expects the company to report earnings of 55 or 56 cents a share.

Margins could also get a boost on early sales of the new Pentium Xeon chip for high-end servers, said

Prudential

analyst Hans Mosesmann, who expects Intel to report earnings of at least 55 cents a share.

Some investors dismiss the significance of the Compaq panic. "We expect to hear that Intel's fabs are full and the Celeron is ramping up significantly," said Jack Kunkle, a fund manager with

Muhlenkamp & Co.

, which manages $250 million in assets. "We believe they will definitely meet expectations and guidance will be good."