El and Thread: I just heard it mentioned on CNBC that GTW is on a tear today because PRU analyst Kim Alexy has replaced DELL with GTW on its recommended list. Too bad CPQ can't get any mileage out of Alexy's STRONG BUY rating!
K
King of the hill
Dell, Compaq, and IBM battle for market share
by Peter Nelson
November 10, 1999
For years, personal computers were divided into two groups: Mac and IBM-compatible. As the computer market opened up, however, the latter became an anachronism. Apple Computer Inc. (AAPL: research, earnings) continues to produce Macs, but International Business Machines Corp. (IBM: research, earnings) has become just another competitor in the PC market, bumping shoulders with Dell Computer Corp. (DELL: research, earnings) and Compaq Computer Corp. (CPQ: research, earnings), among others.
Over the past three years, major computer companies have averaged a 38.8% annual growth in profits, according to Wall Street analysts. Though a slowdown in growth is predicted, the feverish pace at which new technology is being introduced and consumer demand is increasing ensure the continued success of computer companies. According to Wall Street analysts, the group will outperform the S&P 500 in 1999 and 2000.
In their October 25 weekly index of the PC hardware industry, analysts at Prudential Securities give the PC industry a STRONG BUY rating. They "continue to see strong demand trends in the PC sector, positioning shares of these companies to enjoy a strong [second half]."
Dellving ahead
The summer yielded various obstacles for the PC market, including an earthquake in Taiwan, a spike in chip prices, and a scarcity of laptop screens. In spite of these setbacks, third quarter earnings season brought moderately good news: PC sales are up, but dollar growth isn't flourishing, according to Dataquest Inc. In the third quarter, Dell moved up to No. 1 in PC sales in the United States, outselling Compaq for the first time.
In their October 19 report on Dell, analysts at U.S. Bancorp Piper Jaffray maintain a BUY - AGGRESSIVE rating for the company. Responding to supply chain shortages plaguing the PC industry, the analysts reduced their earnings estimates for the third quarter. They believe this slow down is short term, however, as the company's restructuring "should begin generating meaningful revenue in the second half of next year."
Analysts at Merrill Lynch see the impacts of chip shortages and rising DRAM prices lasting well into the fourth quarter, resulting in lowered third and fourth quarter earnings estimates for Dell. In their October 19 report, the analysts give the company a NEUTRAL/BUY rating, questioning the company's plan to offer computers with less memory but bigger hard drives and monitors. They worry that the strategy may not work, as memory is the most recognized variable in a system's performance. In the end the analysts leave their 2001 estimates unchanged, foreseeing long term stabilization.
Running a compact operation
In the most recent quarter Compaq lost its lead to Dell in the U.S. PC sales arena, picking up a 16% market share versus the latter's 18%. Michael Capellas, Compaq's new CEO, is scrambling to restructure the company so it can compete more nimbly. Despite these apparent troubles, Compaq remains the world's largest PC maker.
In her October 27 report, Kimberly Alexy of Prudential Securities examines the impact of Compaq's earnings announcement. Earnings exceeded consensus estimates, while revenues were slightly lower. Alexy lowers her fourth quarter estimates and attributes the mildly disappointing 3Q results to new management and corporate restructuring,. She maintains a STRONG BUY rating, however, saying that she believes Compaq is "showing signs of traction."
Analysts at Merrill Lynch take a slightly different view of Compaq, rating it NEUTRAL/ACCUMULATE in their October 27 report. In response to 3Q results, the analysts maintain their estimates but worry "that Compaq may sacrifice market share in favor of profitable growth." They also believe that the positive impact of strong consumer demand will be tempered by the continued component supply and pricing issues.
A giant steps down
IBM remains one of the most successful technology companies in the United States, ranked No. 6 on the Fortune 500 list. In the PC market, however, both Dell and Compaq have stepped ahead.
Analysts at Merrill Lynch downgraded their opinion of IBM to NEUTRAL/BUY from BUY/BUY, saying that "near-term earnings results will likely be hurt by Y2K pressures." In their report from October 22, the analysts say the company's stock will mend in the long term, but will suffer in the immediate future. Long-term growth depends on whether IBM trims the edges of its portfolio, say the analysts. As a result, IBM will begin exiting desktop and consumer PC sales, an aspect of the company that has been continually declining.
Companies mentioned in this article:
Apple Computer Inc. (AAPL: research, earnings)
International Business Machines Corp. (IBM: research, earnings)
Dell Computer Corp. (DELL: research, earnings)
Compaq Computer Corp. (CPQ: research, earnings)
Research reports mentioned in this article:
Prudential Securities' October 25 report on the PC industry
US Bancorp Piper Jaffray's October 19 report on Dell
Merrill Lynch's October 19 report on Dell
Prudential Securities' October 27 report on Compaq
Merrill Lynch's October 27 report on Compaq
Merrill Lynch's October 22 report on IBM |
