Investors Look To Intel

Investors will be looking to Intel to rescue chip stocks after Merrill Lynch downgraded the sector on Monday.

Merrill downgraded Intel and the chip sector a day before Intel’s earnings report, saying that demand may peak earlier than believed and that Intel may be forced to bring down historically high inventory levels.

“We’re now beginning to doubt whether the inventory rebuild that we need in order to support our industry estimates will occur,” Merrill said in a research note. “That in turn raises the risk that the industry moves closer to supply/demand equilibrium in 2004, and into oversupply in 2005. Any weakness in average selling prices will feed through quickly to profit margins, and earnings. We believe that the risk of a material downward adjustment in the financial outlook for the semiconductor business is higher now than at any point since early 2002. Additionally, we think that we’re closer to a peak in margins and earnings than we previously expected.”

Intel raised revenue guidance to $8-8.2 billion when it held its mid-quarter update on June 3. Analysts expect Intel to report earnings of 27 cents a share, up from 14 cents a year ago. Juniper Networks will also report tomorrow night.

Novellus added to the chip sector’s woes on Monday, falling 4% despite strong results and guidance. The Merrill sector downgrade weighed on the stock, and the company also lost a round in its patent dispute with Semitool .

The Nasdaq fell 9 to 1936, the S&P 500 gained 1 to 1114, and the Dow rose 25 to 10,238. Volume declined to 1.11 billion shares on the NYSE, but rose to 1.51 billion on the Nasdaq. Advancers led 18-14 on the NYSE, while decliners led 18-12 on the Nasdaq. Downside volume led with 51% on the NYSE, and 68% on the Nasdaq. New highs-new lows were 61-44 on the NYSE, and 32-113 on the Nasdaq.

After the close, Oracle extended its offer for PeopleSoft .

During the day, AT&T jumped 6% after a Leucadia investment in MCI sparked takeover speculation in the sector.

Bonso Electronics soared 70% on strong results.

Secure Computing jumped 10% on a takeover offer from CyberGuard .

WebMD edged higher on an acquisition.

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