Intel Slips after Merrill Markdown

Shares fell Thursday after the brokerage cut the chipmaker's rating to neutral, citing its price war with AMD

Merrill Lynch downgraded Intel (INTC) to neutral from buy on Nov. 2, explaining that the computer chip making sector could weaken as manufacturing capacity increases amid an ongoing price war.

Intel, the market leader, has been losing business recently to its rival Advanced Micro Devices (AMD). In response, Intel has been slashing costs and headcount. Chief Executive Paul Otellini told analysts in mid-October that the company is on track to reduce annual costs by $2 billion in 2007 and $3 billion by 2008. He also said the company is expected to finish the year with a headcount of 95,000 and that by the end of next year, the number would fall to 92,000 (see, 10/17/06, "Intel's AMD Troubles Continue").

Merrill estimates that AMD will have 21% of Intel's processor capacity by the end of 2007 and 27% by 2008. "The fact that both companies appear more focused on gaining share than improving margins has led to a collective investment level for next year that is not rational," Osha said in a research note.

Intel's processor-focused capacity looks set to expand by 13% next year and AMD's by around 35%, Merrill says. But the market for personal computers is not expected to grow as fast.

Intel fell 1.5% to $20.70 per share in early trading on the Nasdaq. The shares have risen from a 52 week low of $16.75 per share on June 13.

Noting the stock's strong performance in recent months, Merrill's Osha dropped a 2007 earnings estimate on Intel to $1.18 from $1.30.

"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 still just a large company grappling with slower growth," Osha said in the research note.

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