Bellwether Intel Corp.'s estimates may have been bold, but the outcome may not be as beautiful as the company would have liked.

Lehman Brothers has downgraded its standing on the MPU kingpin, noting missed product deadlines, among other missteps.

"Heading into 2Q04, we had signaled some reservations on our outlook, however, we were left surprised by the impact of Intel's higher production yields prompting a need for it to slow wafer starts and hence lower fab utilization levels and margins," Tim Luke, a managing director at the firm, said in a research note. "Looking forward, lower margins appear to be combined with relatively bold revenue guidance for 3Q04 of up 7 percent to 14 percent (11 percent at mid-point) ahead of normal seasonality in the 6 percent to 8 percent range.

"Currently we consider Intel's aggressive moves in areas such as flash, motherboards and chipsets combined with an improving PC market through July after a mixed June, may render this guidance achievable, although we consider that upside to estimates may remain unlikely in the context of a steady but relatively uninspiring end market for both 3Q04 and 4Q04.  We also recognize that investors are likely to focus intensely on Intel's progress in its attempts to lower its inventory levels." 
 
Lehman stated that Intel's well-publicized delays on several new product platforms could further limit upside to revenue estimates and, while unit numbers are modest, challenges on the delivery of high-end 4GHz solutions may also limit margin expansion if the upward cycle of pricing for the highest-performing microprocessors is delayed. 

"More broadly, we also consider that as Intel seeks to transition away from the steady increase in clock speeds to dual core microprocessors, that the timelines associated with such a bold new initiative could potentially see some slippage in 2005.  We also believe that the margin implications of this strategy are also subject to some uncertainty," Luke said.  
 
On that, the firm has trimmed its calendar year 2005 estimates from $1.33 to $1.30, based on slightly lower revenues in-line with PC growth estimates and some more conservative gross margin assumptions, now 60.5 percent in 2005. 

"As we move into the seasonal lift from back-to-school and given our view that near term guidance for the September quarter could be achievable, we are retaining our overweight rating on this core holding. However, with our CY05 estimates moving lower, we are lowering our target to $26, 20x our revised CY05 EPS estimate, and we see upside limited to around $26 to $27," Luke concluded.

By: DocMemory
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