Merrill's Osha: Intel "Just a Large Company Grappling With Slower Growth"

| About: Intel Corporation (INTC)
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Merrill Lynch semiconductor analyst Joe Osha today dropped his rating on Intel (NASDAQ:INTC) to Neutral from Buy and trimmed his 2007 profit forecast, asserting that “weakening demand and persistent excess capacity are likely to keep a lid on the stock for the intermediate term.” Osha says he’s also “skeptical about the stock’s ability to perform in an environment in which the sector could show weakening price performance.”

Osha cut his 2007 earnings forecast to $1.18 a share, from $1.30, which he notes is still above the Street's estimate of $1.14. “At $21, we think the stock is anticipating higher numbers,” he writes. “If Intel makes $1.10 to $1.20 next year, the Street’s willingness to pay more than 18x-19x earnings will be limited, in our view. That in turn limits upside, especially given the stock’s strong performance during the last few months.” For 2008, he goes to $1.56 from $1.60.

Osha says he still thinks Intel will become more competitive versus AMD (NASDAQ:AMD) in 2007 and 2008, but he has other issues with the stock. For one, he is worried about manufacturing capacity in microprocessors. “Despite abundant evidence that neither company is able to keep fabs full without accumulating inventory or cutting prices, both companies are sticking with their plans [to add capacity],” he writes. He says microprocessor capacity will increase 16% next year, “in a PC environment that even the most bullish forecasts don’t show growing at a similar rate.”

Another issue Osha is worried about is demand. “Current data suggest that aggregate motherboard and notebook shipment growth in Taiwan is going to be slower in Q4 than in Q3,” he reports. “Historically, when that’s happened, the result has been a worse-than-seasonal correction in processor shipment volumes for Q1. We think that’s in the cards for the processor business this time around as well.”

For Intel fans, his conclusion has to be a little disturbing:

Intel is the industry’s largest semiconductor company, but we’ve pointed out several times during the past three years that it’s not a core holding any more, and we want to reiterate that observation today. There could be intermediate-term opportunities to make money in the stock by investing in product cycles at Intel, but without a better diversification story Intel is just a large company grappling with slower growth.

Intel closed the day down 34 cents, to $20.68.

INTC 1-yr chart:

INTC 1-yr chart