Just got this from TSC...
Slowing Cheap PC Sales Threaten to Squeeze Big Boxmakers
By Thomas Lepri
Staff Reporter
6/14/00 11:03 AM ET
PC makers are running out of time for corporate demand to rebound. Because consumer sales might not be there to bail them out if it doesn't.
Tuesday's downgrade of Hewlett-Packard (HWP:NYSE - news - boards) by Sanford Bernstein, based partly on evidence that consumer PC sales for May "appear to be below plan," is just the latest sign of softness in the segment. Merrill Lynch and Prudential Securities have already noted weak May sales of Apple's (AAPL:Nasdaq - news - boards) iMac and iBook products. eMachines (EEEE:Nasdaq - news - boards), meanwhile, warned analysts last month that retail sales fell below expectations in late April and May. The second quarter is typically the slowest period for PC sales, but these shortfalls have been below even seasonal norms.
That's making a dangerous trend for a sector that has been relying on extremely strong consumer sales to make up for weak corporate demand, a phenomenon many have ascribed to a slower-than-expected acceptance of Windows 2000. Analysts haven't been panicked at that slow uptake thus far. Companies will migrate to W2K sooner or later, the thinking goes, and when they do, they'll upgrade to the more powerful PCs the operating system demands for optimal performance. But the mood could grow less complacent if consumer sales stay sluggish.
Charmer in the Dell
In the meantime, PC investors anxiously wait to see whether the current consumer weakness remains isolated to the low end, which is feeling the absence of the rebate programs and Internet service provider deals that pumped up sales of cheap PCs so much last year.
On the Chin
H-P shares take a hit
"I think there's a bifurcation going on in the consumer market now," says Dave Bailey, analyst at Gerard Klauer Mattison. "Companies that target the high end are doing quite well, but people going at lower end and though the retail channel are having harder times. H-P, eMachines and Compaq (CPQ:NYSE - news - boards) are the most vulnerable at the low end."
"But on the high end, it appears that Dell (DELL:Nasdaq - news - boards) and Gateway (GTW:NYSE - news - boards) are doing very well this quarter," Bailey continues. "Demand is strong, and they do a good job of maintaining" average selling prices. Gerard Klauer Mattison has no underwriting relationship with any PC manufacturer.
Slowdown Crowd
More disturbing than the low-end theory is the possibility of a broader economic slowdown. Some important economic data have suggested some moderation of spending: The most recent new home-sales figures came in below forecasts, and Tuesday the Labor Department released the second consecutive weak retail sales report. Meanwhile, a raft of retailers have reported weak or negative same-store sales for May.
"Consumer spending is now subsiding from the unsustainably robust pace of 2000's first quarter," says John Lonski, VP and senior economist at Moody's Investors Service. "Earlier, in the first four months of this year at least, we had retail sales up more than 10% year over year, which sped past the accompanying 6.6% growth in personal income. You don't have to be an economist to know that you can't sustain retail sales growth at so rapid a pace compared to wage and salary income."
A consumer slowdown would spare few boxmakers. eMachines has total exposure to the consumer segment, and Compaq's sketchy performance in the corporate market -- its sales of PCs to businesses declined 7% in the first quarter -- make it very vulnerable. "The same goes for HP," Bailey says. "They had a great deal of strength in the consumer segment. It would be difficult to improve profitability and show revenue growth in their PC groups if they can't sustain that growth in the consumer segment."
The Company You Keep
Dell's heavy focus on the corporate market gives it some measure of insulation from this problem (but none from W2K issues). Consumer-centric Gateway, whose corporate sales sank 19% in the first quarter, is more vulnerable if sluggishness should extend to higher-end PCs.
So far, neither company has admitted any problems. Tuesday, at Bear Stearn's annual technology conference, Dell Vice Chairman James Vanderslice said the company was progressing in line with expectations: "Demand is strong. We are at the high end and we're not seeing any weakness at all."
Of course, with Dell and Gateway both down about 20% from their highs of this year, investors may have already braced themselves for the worst.
"Neither one of them is exactly shooting the lights out," reminds Jeff Matthews, money manager at Ram Partners, who has no position in either stock. "From what I'm hearing, Gateway has a squeaker of a quarter going. And Dell's only meeting reduced expectations. We're rooting for the Chicago Cubs here, not the Yankees."
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