Goldman cuts Intel to sell, says glut looms

Bangalore Thu May 19, 2011 9:27am EDT

Bangalore (Reuters) - Intel Corp (INTC.O) could suffer due to slowing processor shipments, rising competition and record capital expenditure levels this year, according to analysts at Goldman Sachs, who in a rare downgrade cut their rating on the stock to "sell" from "neutral."

Shares of the world's largest chipmaker -- which have gained about a fifth since the company's record quarterly earnings on April 19 -- fell 2 percent in pre-market trade on Thursday. They had closed at $23.88 on Wednesday on Nasdaq.

Goldman analysts, including James Covello and Simon Schafer, also lowered their coverage view on the U.S. semiconductor equipment sector to "cautious" from "neutral" on a likely glut in processors due to recent strong capital expenditure levels.

Capex levels in 2012 will likely decline 20 percent as industry capacity could reach a new peak in the fourth quarter of this year, but will still be 15 percent above the prior peak exiting 2012, well ahead of demand growth, the analysts said.

While Wall Street is forecasting a 6 percent year-over-year rise in Intel's sales, amid expanding gross margins, Goldman analysts expect sales to be about flat as average selling prices fall on excess capacity.

Average selling price will likely decline at least 5-10 percent in 2011for Intel due to the record capex spent this year, improved products from Advanced Micro Devices (AMD.N) and competitive tablet product offerings, the analysts said, and expect Wall Street to cut its 2012 earnings estimates for Intel.

The analysts also expect processor shipments to slow over the course of the year, as they believe processors outshipped PCs by about 10 percent in the first quarter of 2011.

Also, Intel -- whose slow progress in the red-hot mobile business has worried investors -- faces increased competition in the long term from Britain's ARM Holdings (ARM.L) as the UK company's chip technology is favored in devices like Apple's (AAPL.O) iPad, the analysts said.

Energy-efficient chips that conserve batteries and are made with technology licensed by ARM are used by Apple and Samsung (005930.KS), and have become the industry standard in mobile devices at the expense of Intel.

According to StarMine, 31 analysts rate the stock a "buy" or "strong buy," 17 a "hold," while two rate it a "sell."

DOWNGRADES ON INTEL EXPOSURE

Goldman analysts lowered their rating on KLA Tencor Corp (KLAC.O) to "sell" from "neutral," saying the chip equipment maker has the most exposure to the foundries and Intel.

They also downgraded Applied Materials Inc (AMAT.O) to "neutral" from "buy," as they expect the world's largest maker of equipment for semiconductor manufacturing to be hurt by the likely decline in 2012 capex levels.

Applied Materials may, however, be able to offset some of the topline pressure through cost cutting as the company restructures its global supply chain and shifts some manufacturing to Singapore, the analysts said.

They upgraded Lam Research Corp (LRCX.O), which supplies tools for etching circuits on to microchips, to "buy" from "neutral," saying the company's above-average memory sales, and limited Intel exposure should allow it to outperform peers.

(Reporting by Tenzin Pema in Bangalore; Editing by Maju Samuel)