As the market turned decisively negative on Thursday morning, no sector was hit heavier that the semiconductor industry. An analyst at Bank of America Merrill Lynch (BAC) downgraded the entire sector’s outlook from “positive” to “negative” and also downgraded 8 stocks in the sector. The most notable downgraded stock in the sector is Intel (INTC) which is trading 5.5% to the downside on heavy volume. BofA had been among the more bullish on Intel with a price target of $27.00, but in today’s announcement they reduced that target significantly to $21.50. Others stocks suffer downgrades include Texas Instruments (TXN) and Marvell Technology Group (MVRL).
Among the reasons for the bearish note on chip stocks were weaker trends in PC supply chains. Bank of America contends that Intel and others have been shipping a greater number of CPU’s than PC’s that have been shipped, which suggests there is ample supply of chips to accommodate any build in PC demand. The note went on to say that unless there was a sharp upturn in the economy there is a possibility of an inventory correction. This scenario has skewed the risk-reward negatively and prompted the downgrades.
Intel and other chip stocks had enjoyed a decent run of late and that is partially due to positive comments from Intel’s CEO as he anticipated strong performance from a PC refresh cycle. In September, Mr. Otellini made comments about the convergence of the upcoming release of Windows 7 (MSFT) and corporations starting to loosen the purse strings for IT spending as reasoning why the future is bright. However, the market has not really caught on to the CEO’s pep-talk as the stock now sits lower than it did then, and the overall analysts action has been to lower estimates in the last month. Perhaps the growth of the corporate IT refresh cycle is still coming, but up until now it must be a disappointment to Otellini.
As of this week’s report we are reiterating our Fairly Valued stance on Intel as it is trading about where we would expect given the current fundamentals. It is trading within the historically normal ranges of price-to-cash earnings and price-to-sales. In fact, it would take either a substantial improvement to fundamentals or for the price to drop another 15% for us to become more bullish on Intel.
