The Day Ahead: Intel call boosts Kumar's cachet

Commentary: I've been back from a scenic vacation in Nova Scotia one day and I'm ready to run back to the highlands after hearing about all the handwringing over how analysts missed the boat on Intel's revenue warning.

How did so many analysts drop the ball on Intel's third quarter sales problems?

Three words: analysts are sheep.

It's really that simple and it has been that way for awhile. Many analysts are spoon-fed by the companies they cover in exchange for access. Throw in the fact that analysts also work for firms that normally have underwriting ties, and you can figure out pretty quickly why Wall Street's sages are bullish most of the time. Folks, anyone watching Wall Street knows about the analyst game.

Analysts were great at telling you why Intel was a dud after the earnings warning. But few analysts flagged the problems ahead of time. Simply put, there's no glory in going out on a limb.

That may be changing, and contrarian could become cool. USB Piper Jaffray analyst Ashok Kumar flagged Intel a few weeks back on concerns about corporate sales and troubles in Europe and Japan. Intel shares slid on Kumar's downgrade, but other analysts stuck to their "strong buy" guns. The response? Kumar was trashed for doing his own homework.

"Asok Kumar (sic) is the same moron who downgraded AMD stock. This guy must be selling short and is looking to scalp the small investors!"

That TalkBack comment from a self-proclaimed ZDII "surf bum and student" was common among investors. Going against Intel isn't easy. Banc of America analyst Richard Whittington also downgraded Intel following Kumar's call, but reversed course after a week. He just couldn't stick to his guns.

Kumar did and now he's a media star (see that mug in the Wall Street Journal?) because he nailed the Intel call. Kumar already has good press relations because he's quotable and does his own homework -- which is why we call him. From what we can tell, Kumar's call on Intel could pay off in a big way.

How will Kumar's media attention pay off? Kumar could become one of those Wall Street headliners just like Henry Blodget, who while at CIBC Oppenheimer gave Amazon a big price target and rode it all the way to be a Net guru at Merrill Lynch. At the very least, Kumar could get a raise.

But Kumar is far from perfect. He seldom has a nice thing to say about Advanced Micro Devices despite some stellar quarters and a major stock runup. Kumar's frequent pummelling of Brocade also has a few investors scratching their collective heads. Kumar was on target by flagging problems at Intel and Dell Computer before the rest of the pack.

Add it all up and Kumar's a guy who can be off the mark at times, but should be noted for his insights. He won't get a lot of execs to call him back, but we'll give him originality points anytime.

Palm continues to deliver solid results, but worries about component shortages remain a concern. Palm reported first quarter earnings of 4 cents a share on sales of $401 million as it shipped 1.5 million units in the quarter.

So what's the problem? Component shortages will remain a drag on the current quarter and Palm is racing to meet demand. In addition, margins will slip as the company's low-priced m100 product gains momentum. The m100 is priced at $149 to boost market share, but that price cuts margins. The m100 is expected to cut average selling prices in the second and third quarters before stabilising, officials said.

Meanwhile, Palm's high-end PalmVIIx sales were hampered by component shortages. Toss in the fact that revenue from the Palm OS is slight -- $4.6m in the first quarter -- and you'll continue to see margin worries.

However, Palm officials said demand is ready to really boom if component shortages ease. These shortages eased in the first quarter and should smooth out in the third and fourth quarters.

As for the holiday season? Palm said its inventory situation could be better considering some retailers were out of stock of Palm products, but the company should be positioned for the holiday rush.

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