Lehman Brothers upgraded
to overweight from equal-weight Tuesday, saying the chip giant is about to see its gross margin bottom out after a yearlong inventory correction.
The brokerage left its price target intact at $27 and said the risk-return calculus might currently be favorable with the stock trading at about 18 times its 2005 earnings estimate of $1.18 a share plus Intel's $2.30 a share of balance sheet cash. The stock rose 27 cents, or 1.2%, to $22.97 on Instinet Tuesday.
Lehman said it expects inventory levels to improve in the fourth quarter. It noted a prediction from management for several-hundred-million-dollars of reductions, which could leave its days of outstanding inventory at about 77, close to its historic average of 64 to 66 days.
"Management has continued to voice that utilization levels at 300 millimeters and 200 millimeters
at semiconductor factories may bottom in the fourth quarter of 2004, possibly underpinning an improved margin picture into 2005," Lehman said in discussing the inventory overhang. "In addition, we note that there may be opportunities to reduce CPU costs in 2005 that ran amiss in 2004 due largely to execution problems."
"We acknowledge that while some risks remain, including incremental competition from
unit profitability, and possible hints of some double-ordering ahead of Chinese New Year, and given back-end assembly/test/packaging constraints at Intel, we believe that with a possible capacity and gross margin trough in the first half of 2005, smoother product transitions likely, at current levels," Lehman wrote, "the risk/reward on Intel remains attractive."