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Intel's spending plans may backfire

Intel Corp Chief Executive Officer Craig Barrett's US$4.7 billion investment last year in new plants and equipment for making computer chips is starting to look more like a gamble, investors said.

Barrett spent US$12 billion in the past two years on equipment to double a plant's chip-production capacity and make more advanced semiconductors, following a strategy at the world's largest maker of computer chips to boost spending during slumps to prepare for a rebound. His plan may backfire this time without growth in demand in coming quarters, investors say.

"If 2003 moves along and we're still not seeing a significant increase in demand, it's going to start eating in to their profitability," said Brian Eisenbarth, who helps manage US$800 million at Davidson Investment Advisors and holds about 350,000 Intel shares.

"Demand has to pick up in order for them to cash in, and we're not seeing it yet."

Barrett's strategy, coupled with new products to stimulate demand, have so far has failed to lift sales, which fell 21 percent in 2001, and Intel has predicted they would be little changed for last year. With few signs of a pickup, the company, which reports earnings later today, may have to slash prices more than planned or cut output, possibly resulting in depreciation costs reducing profit.

Intel shares lost half their value last year. They fell 4 cents to US$17.38 yesterday on the Nasdaq Stock Market.

The Santa Clara, California-based chipmaker had fourth-quarter profit, before certain costs, of US$0.14 a share on sales of US$6.9 billion, according to Thomson First Call average analyst estimates. Intel had net income of US$0.07 a share on sales of $6.98 billion in the year-earlier period.

"They're making a bet we'll be having a reasonably decent rebound by the end of this year," said SG Cowen Securities Corp.

analyst Mark Grossman, who rates the shares "market perform" and doesn't own them.

"If it doesn't happen, they're going to take a big hit," he said.

Intel may be able to reach profit, excluding some costs, of 15 cents a share on sales of US$6.95 billion because it sold a higher percentage of more-costly mobile and computer server chips during the holiday season, Salomon Smith Barney analyst Jonathan Joseph said in a note to clients yesterday. Sales in Europe and Japan were probably better than Joseph first thought, he said.

The company, which spent US$6.67 billion and US$7.31 billion on plants in 2000 and 2001 respectively, will for the first time tell investors how much it plans to spend this year, spokesman Tom Beermann said. Spending may drop to US$4 billion or less in 2003, Joseph said.

Barrett, 63, earned US$1.65 million in salary and bonus in 2001 plus 484,696 stock options worth US$19 million in 10 years if the shares gain 10 percent each year.
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