Intel Job Cuts Fail To Inspire Investors

Intel's stock closed on the Nasdaq exchange Wednesday (Sept. 6) at $19.31 a share, down 68 cents, or 3.4 percent, from $19.99 on Tuesday. The chip giant announced job cuts Tuesday totaling 10,500 workers.

Analysts were somewhat disappointed by Intel's announced cost-cutting measures, especially by the staff reductions. Intel's "headcount reduction is less than many analysts were calling for," said analyst Doug Freedman of American Technology Research Inc. (Greenwich, Conn.).

Freedman was referring to various reports, which indicated that Intel needed to cut up to 20,000 jobs in an effort to slash costs.

There were other issues as well. "Management did not 'clean the decks' with an inventory write-down, removing major investor concern," Freedman said in a report. "Inventory risk persists, slowing the gross margin recovery."

He also noted that Intel did not address the fate of its NOR flash memory business in its job cuts announcement. The analyst postulates that STMicroelectronics NV could be working on a deal to acquire the NOR flash memory business from Intel.

Meanwhile, thanks in part to Intel, the overall technology-heavy Nasdaq composite index dropped 37.86 points, or 1.72 percent, to 2,167.84.

The technology sector's performance was also influenced by several economic reports that triggered speculation the Federal Reserve could hike interest rates.

Online reports noted the U.S. Labor Department reported a 4.9 percent rise in wages during the second quarter, exceeding previous estimates of both the agency and economists.

On top of that, an Institute of Supply Management report said the service sector index rose to 57 in August from 54.8 in July—exceeding economists' estimates and further fueling concerns about rising interest rates.

Such a scenario is not likely to help Intel (Santa Clara, Calif.), whose share price fell despite generally positive comments from analysts about the cuts. Some raised future earnings projections for the troubled microprocessor supplier.

Nor was there an apparent surge of investor confidence when Apple Computer announced earlier Wednesday that it would equip iMacs with Intel's Core 2 Duo processor.

AMD, which has been steadily gaining market share on its rival, did nothing to soothe the fears of Intel investors by announcing Wednesday it would upgrade its line of dual-core Athlon desktop processors, to compete with Intel's Core Duo offerings.

Analysts appeared more supportive of Intel than investors. A report by Cowen and Co. stated, "We view the substantial and broad cuts announced by Intel as positive evidence the company is streamlining itself around its core PC processor competencies."

The report expects the cuts to thrust Intel into a stronger competitive position, particularly following the company's recent product introductions. It also praised Intel's intention to lower marketing expenses, which the market researchers questioned.

Cowen expects Intel's earnings to jump 32 to 34 cents per share when the cuts are fully implemented in 2008.

In some respects, the American Technology Research report also commended Intel for its actions, bolstering Intel's 2007 fiscal guidance to earn $1.19 per share, up from $1.04 previously. However, the report also criticized Intel for not writing down its excess chip inventory, citing the inaction as detrimental to gross margins.