Tough Times Ahead for Intel?

Against a background of crisis on Wall Street as more big names in finance fall to the credit crunch, a report by FBR Capital Markets indicates Intel and the PC hardware space may be headed for a slowdown of its own.

The culprit? The U.S.’s economic downturn is now involving more than just the U.S., having spread to other areas of the world. Gartner made a similar prediction that there would be a slowdown in the U.S. and western Europe this fall and into next year.

FBR found that problem is already manifesting in the form of difficulties in Europe similar to those being experienced in the U.S., along with a few unique issues.

While the rest of the world remained strong during the first half of the year, it’s now beginning to follow the U.S.’s economic lead. England, for example, had a housing bubble to rival the U.S., and now London banks “are sitting on a bunch of worthless housing titles,” Craig Berger, senior vice president with FBR, told

Meanwhile, at home, stocks plunged Monday as investors reacted to a triple dose of ominous news: the bankruptcy filing at Lehman Brothers (NYSE: LEH), Merrill Lynch’s (NYSE: MER) sale to Bank of America (NYSE: BAC) and reports that American International Group’s (NYSE: AIG) has requested emergency funding from the Federal Reserve.

Inflationary commodity costs and the credit/capital market drying up is not just a problem in the U.S., it’s hitting Europe as well, and China is seen pulling back after the Olympics. While other sectors remain strong, they can’t compensate for weakness in the largest markets.

The U.S. economy thus far has defied the expected recession, which is defined as two quarters of negative gross domestic product growth. In late August, the second-quarter GDP was revised upward, from 1.9 percent to 3.3 percent. Berger attributed that to millions of Americans receiving $600 or more tax rebate checks from the government, which are now spent.

FBR now sees modest weakening in the PC market. The company has cut its third-quarter notebook forecast by one percent, or 300,000 units, and its desktop forecast by five percent, or 1.6 million units. For Q4, it expects notebooks to grow 10 to 15 percent and desktops to be flat or up by as much as five percent.

Because of its weaker forecast, it now puts Intel at the midpoint of its Q3 revenue guidance range and believes Q4 numbers could be off, as prior estimates were based on a good third quarter. As a result, FBR lowered its 2009 revenue and EPS estimates for the company as Q1 seasonality could be worse than usual.

Intel (NASDAQ: INTC) declined to comment, stating it is in the quiet period following the end of its quarter.

Far more troubling is the growth of inventory. Most retail outlets operate on a very short inventory basis, meaning they keep very little in stock and turn it over very quickly. FBR surveyed retailers and found the highest days of inventory since the second quarter of 2001, the height of the dot-com implosion.

This causes a ripple effect, as retailers like Best Buy tell OEMs not to send as much supply, and the OEMs then order less from vendors like Intel, memory manufacturers and other suppliers.

Atom, Intel’s hot new embedded chip, is the kind of product that’s either a glass that’s half-full or half-empty — meaning it can be good or bad — and Berger said he views it as half-empty. Chiefly, that’s because customers concerned over price will go for it in a low-cost netbook instead of more expensive notebooks. Also, it’s a very new product, barely registering in sales so far.

“The bottom line is it’s too small to move the needle,” Berger said.

Ironically, AMD (NYSE: AMD) could prove an additional pain for Intel in the coming months, which would be the first time in a while. The smaller chipmaker’s poor showing in the recent past has been part of the reason why Intel has been doing so well.

“AMD hasn’t had fresh product to sell — they’ve been selling brown bananas,” Berger said. “But AMD is coming back with new product. Some of the pricing that Intel has enjoyed is going to come to an end.”

On the plus side, Berger hopes the U.S. is through the worst of its economic troubles. “I take the view the U.S. is hopefully stabilizing and working through our housing and credit problems and there will be a return to growth in 2009 and 2010, and the rest of the world is a few quarters behind,” he said.

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