Intel Corp reported earnings after the stock market closed on Tuesday. Before the report, ABN Amro Inc's Paul Leming told investors to sell the company's shares.
"The company will either miss the consensus estimate for the quarter [noticeably], or will make the quarter by borrowing so heavily from the third quarter, that third-quarter earnings will be very disappointing," Leming wrote in a four-page report to clients before the Intel report.
The price war in microprocessors between Intel and Advanced Micro Devices Inc and plunging prices for flash memory -- chips that store information when a computer's power is turned off -- mean that Intel probably won't meet sales and profit goals, the analyst said.
Leming lowered his rating on Intel to "reduce" from "hold," making him the only one of 29 analysts following the company to recommend selling the shares. Intel could fall below US$20, a decline of at least 31 percent from yesterday's close, he said.
Some investors said they were surprised that Leming lowered his rating on the stock the day Intel reports earnings.
"The timing of it is surprising because the environment that we're in seems to be one where companies prefer to pre-announce if there is any possibility of them not making the quarter," said Mark Herskovitz, manager of the US$2 billion Dreyfus Premier Technology Growth Fund, which owns Intel shares.
The analyst said the timing was coincidental.
"I'm sure people are going to say, `He did this to make a splash,'" Leming said in an interview. "I would have preferred to do it two weeks before, or two weeks after, but internal issues kept that from happening."
He said he'd been "concerned for a while" about the price of microprocessors.
The "last straw" was Advanced Micro Devices' announcement last Thursday that the chipmaker may post a third-quarter operating loss as prices tumble, Leming said.
Leming was out of the office Friday and on Monday conferred with colleagues preparing a report on the outlook for the industry before publishing his research.
"As a rule we don't comment on analyst reports," said Robert Manetta, an Intel spokesman.
The 46-year-old Leming, an analyst since 1983, followed chemical companies such as DuPont Co and Hercules Inc for most of his career. He worked for ING Baring, which was bought by ABN Amro this year. Leming switched to following chip stocks and began coverage of Intel in May this year.
He said investors are using unrealistic growth forecasts in valuing Intel. The days of the semiconductor industry growing 17 percent a year are becoming a "hazy memory," Leming said, adding that with personal computer sales slowing, it is not hard to forecast microprocessor revenue growth slowing to below 10 percent a year.
"It is difficult to reconcile that type of growth with a premium valuation," Leming says. "The average non-tech company in the S&P 500 today trades at 15 times 2002 earnings. Even if you are willing to attach some premium to Intel's multiple, it is difficult to come up with a rationale for Intel to trade at more than 20 times next year's earnings."
Intel now sells for 38 times next year's expected earnings. Priced at 20 times, the stock would sell for US$15.20.
Intel shares have fallen 60 percent in the past year versus a 20 percent decline in the Standard & Poor's 500 Index.
Because chips are used in everything from cellphones to servers, investors are watching Intel and the rest of the chip industry for signs of a turnaround in technology shares.
While Leming says Intel is likely to show less of a decline in microprocessor sales than Advanced Micro, "the odds are high that Intel's revenues from microprocessors will come in below expectations."
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