NEW YORK (MONEY Magazine) - Just about every company has been cracked by this market. But the best ones -- the real blue chips -- are taking advantage of the downturn and will come back stronger.

Unfortunately some big names are in for more trouble. We review three of them here -- Intel, Home Depot and AT&T. Click on a name to go straight to our analysis.

Also in this series Where have all the blue chips gone? True Blue: Microsoft, Wal-Mart, more

Like Microsoft, Intel overwhelmingly dominates its industry -- it makes 80 percent of the microprocessors that go into PCs -- and like Microsoft, its fortunes are tied to the sluggish computer industry.

Yet unlike Microsoft, Intel has competitors that are making inroads with PC makers. For years now, Intel has been trying furiously -- and without much success -- to diversify its revenue stream to reduce its dependency on computers, which account for 80 percent of its $26.6 billion in sales. Intel-branded digital cameras won't help much.

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Additionally, Intel (INTC: Research, Estimates) is a victim of its own success. It is so adept at creating smaller, faster, cheaper microprocessors that it suffers chronic inventory problems -- and crimped gross margins -- from moving out old chips when the new ones appear. Plus, it constantly has to build new factories, or retrofit old ones, and must keep them running at high rates just to break even.

The explosive PC demand of the latter half of the 1990s masked the cyclical nature of Intel's business -- something that pre-1998 tech investors know all too well about the company. Intel's sales have slid 21 percent and profits have plunged 75 percent from their 2000 levels, when the company garnered $34 billion in revenue and earned nearly $11 billion.

Back in 2000, Intel was riding the Internet boom, and traded as high as 63 times earnings. Since then, Intel's shares have crumbled by 75 percent, yet still trade for 38 times the 48 cents it is expected to earn in 2002. -- back to top

Why is Wal-Mart a blue chip but not Home Depot, often called the next Wal-Mart? Home Depot has admirable attributes: a long history of growth, a great brand, tons of cash (nearly $6 billion) and little debt ($1.3 billion). Plus, it pays a small dividend (yield: 0.9 percent). At $25, its shares trade for 18 times profits -- less than half their level for most of the late '90s. But Home Depot (HD: Research, Estimates) faces hurdles that Wal-Mart has already overcome.

While Wal-Mart can still grow by taking share away from the broken-down companies it trampled on the way up, Home Depot, the nation's second-largest retailer, must cope with a surging competitor to its home-improvement stores.

Lowe's (LOW: Research, Estimates), whose expansion plan targets Home Depot's strongholds in major metropolitan markets, has given it fits in head-to-head competition. Furthermore, Home Depot is now facing a period of uncertainty that Wal-Mart conquered in the early '90s: There are still places to build stores, but the company has already mined the best markets.

What's more, Home Depot's new CEO, GE alumnus Robert Nardelli, has alienated store managers and employees by centralizing decision-making, says fund manager Ken Heebner, who prefers Lowe's stock.

Investors have reacted by pummeling its shares, which have fallen by 45 percent in 2002. Home Depot's 1.42 beta highlights investors' unease about its prospects. Wal-Mart ascended the throne by crushing the likes of Kmart. For Home Depot to become a blue chip, it has to prove it can do the same against a strong, aggressive competitor. -- back to top

For decades, AT&T was the consummate blue chip, enjoying such a reputation for safety and reliability that it was considered the ultimate stock for widows and orphans.

When the government unplugged Ma Bell's monopoly status in 1984, this once unassailable stock went on a diversification tear that led it into disastrous forays, such as making computers and cash registers. After jettisoning its mistakes and spinning out its equipment division (now known as Lucent), AT&T (T: Research, Estimates) wound up where it started in 1984: facing the rapid deterioration of its telephone monopoly.

For the past five years, CEO Michael Armstrong has tried everything possible to secure Ma Bell's future and failed. AT&T's main problem -- and to his credit, Armstrong recognized this -- is that its products vie in a competitive marketplace but have all the characteristics of commodities.

Without monopoly power or some kind of valued-added feature, profit margins of such businesses are weak and always under pressure. Armstrong attempted to buy the company out of these problems by using the sumptuous profits from its consumer long-distance business to acquire the musty cable pipelines of Tele-Communications, becoming a leading provider of broadband (a.k.a. cable) services.

Then he split the company apart, spinning off its wireless division, selling its broadband unit to Comcast and leaving AT&T shareholders with the same dilemma he faced when he started: a struggling consumer long-distance business and a promising corporate telephony division.

When the dust clears from this restructuring, AT&T won't be as burdened by its current $36 billion debt load, but it will still have substantial debt. And its once rich dividend has been slashed nearly 90 percent. -- back to top