Some favorable CPQ press from Barrons on-line tonight....
PC Stocks Ain't Dead Yet
By Carolyn Whelan
Until recently, technology investors have steered clear of computer
hardware companies.
If cheaper PCs, chip shortages and economic turmoil
abroad weren't enough, these companies were also
grappling with the impact of Y2K and the anticipated
spread of handheld devices and so-called Internet appliances. No wonder
investors stuck with wireless and business-to-business Internet plays.
But now the picture looks different. Recent market research and earnings
reports from some hardware companies suggest that the tide may be turning
for PC stocks.
And some on Wall Street point out that though these stocks almost certainly
won't rack up the gargantuan price appreciation of a Qualcomm or a JDS
Uniphase, they have good growth prospects and real revenues and earnings
-- today.
"The PC remains king," declares Roger Kay, an analyst at the International
Data Corp., a market research firm, noting the record shipment volume in
1999. "Everyone is buying because of the Internet."
Indeed, despite a soft fourth quarter (which experts blamed on earlier PC
purchases and supply shortages), U.S. PC shipments grew a whopping 25%
in 1999, according to IDC -- a huge increase over 1998's 15% growth. Even
better, percentage growth in worldwide PC shipments nearly doubled to
23%, from a 12.5% rise in 1998.
That's why Apple, for example, saw its profits grow 20% in its fiscal first
quarter, server manufacturer Sun Microsystems' net income rose 35% and
IBM topped fourth-quarter profit expectations, although revenue growth
seems to be slowing.
"1999 was a bang-up year," says Kay.
Previously perceived problems may have, in fact, begun to resolve
themselves. Prices, supply shortages and overseas economies have stabilized.
And as behemoths like IBM exit the retail PC business, it provides an opening
for leading PC players -- and may dampen the incidence of cutthroat retailing
price wars.
In fact, average selling prices for PCs actually are going up. They rose to
$844 in December, from $789 in August, according to market research firm
PC Data.
The best news of all: PC demand is growing again, and should remain steady,
particularly overseas. Domestically, new product releases should stimulate
corporate demand. For instance, Microsoft's new Windows 2000 operating
system, expected in February, is supposed to make systems more secure and
stable -- two key factors in enabling e-commerce.
Moreover, firmer prices, an ample supply of parts and overseas growth are
boosting previously shrinking profit margins. (The spike in prices of memory
chips after last fall's earthquake in Taiwan appears to be behind us now.) And
explosive demand for notebook PCs and Internet servers, where many box
companies get the lion's share of their profits, should help their bottom lines.
That bodes well, of course, for usual suspects Microsoft and Intel, but it's also
good news for Dell Computer and Compaq Computer -- once market
leaders whose stocks have lagged lately.
No. 1 U.S. PC maker Dell should
particularly benefit from strong demand
for servers: It gets around 17% of its
revenues from sales of workstations,
storage and servers. It also sells the
most notebook computers in the U.S.
-- one out of every six, according to
IDC.
"A tiny fraction of all the servers that
are required for the Internet exist
today," notes Mark Herskovitz,
primary portfolio manager of Dreyfus Premier Technology Growth
Herskovitz. That means plenty of upside for server manufacturers, like Dell,
which Herskovitz calls "a core holding" of his fund.
The release of Windows 2000 also should stimulate demand for corporate
PC purchases.
Microsoft's much hyped and long-delayed melding of its Windows operating
system for PCs and Windows NT for networked computers "is a substantially
different program," contends Herskovitz.
Compaq could benefit from robust consumer demand (a faster- growing
market than corporate), as well as increasing overseas demand for PCs
(worldwide and in Europe, it's number one). Compaq also sells the most PC
servers in the world, according to Kevin McCarthy, an analyst at Donaldson,
Lufkin and Jenrette.
"They're introducing new products, working on [their] logistics and cost
structure, and certainly [are] under much better management than they were
under [former CEO Eckhardt] Pfeiffer," says Kay. (See Weekday Trader, "Is
It Turnaround Time For Compaq?," July 12, 1999.)
Compaq reported better-than-expected fourth-quarter earnings late Tuesday
-- 19 cents a share, topping First Call's consensus estimates of 16 cents a
share.
Of the hardware manufacturers,
Lawrence York, lead portfolio manager
of the WW Internet Fund, calls Dell
and Compaq "the most attractive in
price. Dell is probably in a good buy
range."
At a late afternoon price of 42 1/8, Dell
is about 23% off the 52-week high of
55 it set last February. Its P/E of 41x
the $1.02 it is expected to earn in the
fiscal year ending January 2001 is only
slightly above its projected earnings growth rates of 40% next year and 35%
over the long term.
"Relative to the technology part of the S&P, the stock is cheap: [It] is
expected to increase its earnings at four times the [growth of the] market, but
is selling for less than twice [the market's P/E]," says Herskovitz.
Compaq stock, which traded at 33 late Tuesday, has begun to show some
good momentum after a long dormant period. It remains a third off its
52-week high of 49 1/4 it set last January. But at 31 times the $1.40 it is
expected to earn in 2000, it's trading at a reasonable premium to its projected
20% earnings growth rate next year and about in line with its five-year
average P/E of 28x forward earnings.
Wall Street has been turning more positive, too. Richard Chu of S.G. Cowen
recently upgraded the shares to Buy from Neutral on January 14th, and
McCarthy of DLJ boosted his rating on the stock to Buy this week, with a
price target of 45.
"Compaq is a turnaround story, and has more upside than downside," says
James Poyner of C.E. Unterberg Towbin.
PC stocks are not without risk, of course. Palm Pilots and Internet appliances
could cut into PC sales. And pricing pressures and supply shortages could
kick in again.
"But the rush to get on the Internet is so powerful that it's going to dominate
the [PC] market for a couple more years," says Kay.
As the PC business improves, investors could rush back into PC stocks, too.
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