Goldman cuts Intel to sell as supply glut looms, shares fall

Intel Corp could suffer due to slowing processor shipments, rising competition and record capital expenditure levels this year, warned Goldman Sachs analysts, who in a rare downgrade, cut their rating on the stock to sell, sending its shares down nearly 3 percent.

Goldman analysts, including James Covello and Simon Schafer, also lowered their view on the U.S. semiconductor equipment sector to cautious from neutral, citing 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, but will still be 15 percent above the prior peak exiting 2012, well ahead of demand growth, the analysts said.

The Philadelphia Semiconductor Index <.SOX> was down 1.26 percent at 432.30 points.

Shares of KLA Tencor Corp fell 5 percent while those of Applied Materials Inc were down about 3 percent, after Goldman analysts downgraded both stocks by a notch each, on looming excess supply.

Intel shares -- which have gained about a fifth since the company's record quarterly earnings on April 19 -- were down 62 cents at $23.26 in morning trade on Nasdaq.

According to Thomson Reuters data, 31 analysts out of the 50 tracked by StarMine rate the stock a buy or strong buy, while 17 rate it a hold, and two others rate it a sell.

RISKS FROM RECORD CAPEX LEVELS

Goldman expects Wall Street analysts to lower their 2012 earnings estimates for Intel as the company's record capital expenditure in 2011 will hurt sales.

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 may decline at least 5-10 percent in 2011 owing to the record capex levels at Intel this year, as well as due to improved products from Advanced Micro Devices and competitive offerings for tablets, they said.

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.

In addition, 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 as the UK company's chip technology is favored in devices like Apple's 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.

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