Merrill Lynch & Co.’s Thomas P. Kurlak and Mark Edelstone of Morgan Stanley Dean Witter are having a $64 billion disagreement over Intel Corp.
One of these research analysts is going to be wrong, and anyone who cares about Intel, semiconductors, personal computers or tech stocks ought to be paying attention. What’s more, their intellectual spat provides a rare window on how analysts affect stock prices through the sheer force of their recommendations.
Kurlak follows semiconductors for Merrill in New York and is perhaps the most prominent bear on Intel. Edelstone analyzes chips for Morgan in San Francisco and thinks people like Kurlak are crazy for abandoning Intel just because the semiconductor market is a little soft.
Does their little quibble matter? You bet.
Kurlak and Edelstone work for tremendously powerful brokerages with a vast clientele that carefully watches their stock pronouncements. It’s also noteworthy because the two are so far apart–their difference in estimated per-share earnings for 1999 is $1.35, or more than $2 billion. And they’re staking their reputations on perhaps the most important tech-stock position of our day.
Kurlak thinks Intel’s stock is heading south, from its current $80.31 to about $70, and possibly less. Edelstone sees a share of Intel trading for $110 within a year.
The difference in the valuations they’re projecting, based on Intel’s 1.6 billion shares outstanding, is roughly $64 billion.
Kurlak, 51, has worked at Merrill Lynch since 1978 and has a record of accurately calling near-term shifts in semiconductor stocks. He thinks Intel’s in big trouble. He sees the PC industry having hit a saturation point where Intel can’t keep up its game of charging top dollar for more powerful chips as prices plummet for less powerful ones.
Specifically, he worries that the advent of the sub-$1,000 PC will continue to erode Intel’s profitability.
“We find it hard to believe that a market sector that hardly existed one year ago, and is now 27 percent of U.S. retail will not keep increasing,” he told clients. “Therefore, we expect Intel’s average sales prices to remain under pressure.”
Kurlak thinks Intel, which earned $3.87 per share in 1997, will earn $2.95 this year and $2.90 in 1999. And he’s not buying for a moment the company’s guess that its business will turn later this year.
“Management’s expectation of resumed growth in the second half seems to hang by a thin thread,” he says.
Edelstone, 36, says the Pentium II microprocessor will give the company new momentum later this year.
“Intel’s going to grow a wall of glory right now,” he says, adding that the company will “distance itself from the competition” and surprise Wall Street, just as it did in 1996, after the last semiconductor-industry slowdown.
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Edelstone is betting Intel will earn $3.25 per share this year and $4.25 next. For comparison, a consensus of 32 Wall Street analysts guesses Intel will earn $3.16 and $3.82 in 1998 and 1999 respectively, according to First Call Corp.
Kurlak’s most recent report to clients–when Intel last traded for about $84–was titled, “Expect Rally to Fail.”
For his part, Edelstone counsels keeping the faith.
“This is a classic example of people jumping off the train at the wrong time,” he says, of those who’d abandon Intel now.
Check back in 12 months to see who’s right.