September 11, 2000 1:57pm
2HRS2GO: PC names look strong to PaineWebber
By Sergio G. Non 22GO ZDII
Some PC stocks are falling today, but if PaineWebber is right, the
sector is fine, especially some old names you wouldn't normally view
as leaders these days.
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Last week PC makers got a lift from an International Data Corp.
report that predicted reasonably strong unit shipments for the third
quarter. The note marks a turnaround from IDC's bearish call in July.
"You'll see why we call IDC 'I Do Change' " PaineWebber analyst
Don Young joked this morning during a conference call with
institutional clients. "Particularly in near-term PC trends, I've tended
to ignore (IDC) since the beginning of my coverage of the PC sector
in the early '90s."
Nonetheless, he agrees with the market research firm's latest
conclusion. One of Wall Street's better-known PC analysts, Young
issued a research note lending further support for views of an upbeat
second half for the PC industry.
Shares of PC makers rose briefly after IDC last Thursday predicted
worldwide unit growth of 19 percent for the full year, including 18.5
percent growth in the third quarter and 19.5 percent for the second
half overall.
And Young today stuck with his previous prediction of 17 percent
unit growth for the year. Granted, that's not quite as high as IDC's
expectation, but analysts tend to err on the side of caution. Besides,
Young's forecast is still robust, especially in the fourth quarter, when
Young sees a 20-plus percent improvement year-over-year. Some of
that will be fueled by an easy comparison; PC buying in the fourth
quarter of 1999 was hampered by Y2K fears.
That growth will continue shouldn't surprise anyone. That it will
come largely from retailers and dealers might be news, though,
considering how often those venues have been written off by
proponents of direct sales.
"Retail PC demand strength is evident in both the U.S. and Europe
(UK/Germany/France)," Young writes in his note.
"Dealer/Commercial PC demand remains weak worldwide, but there
is no evidence to support that its getting worse and may in fact be
modestly improving."
You get that view when you look beyond the U.S. market. For
instance, more than two-thirds of PCs in Europe's three largest
markets sell through retailers, distributors and dealers, according to
PaineWebber's data.
"It's really an indirect type of world over there," Young said during
today's call.
Which explains why he seems particularly optimistic about IBM
(NYSE: IBM) and Compaq (NYSE: CPQ), both of which have been
notable laggards in the recent past. "It's pretty rare that we even talk
about IBM on these calls, because there hasn't been much positive
to say about IBM's PC business for quite awhile," Young said.
Now Big Blue is surging, Young believes. Although the company has
pulled out of U.S. retail, it still uses other indirect channels.
"The story that really stands out is IBM," Young said. "IBM's share
has really jumped very very sharply."
Young, who once called on IBM to abandon the desktop PC
business, now believes IBM will report a profit in its personal systems
division for the first time in several quarters. To be fair, today's
research note doesn't directly contradict that view; most of IBM's
strength comes from sales of ThinkPads and servers, Young said.
So strength in indirect translates into strength in Europe. On the
other hand, such a strong overseas presence has its downside,
namely currency flucutations. Young didn't address that, but
Goldman Sachs' Laura Conigliaro did; as Young issued his
optimistic report, Conigliaro slashed her revenue and earnings
estimates for IBM because of Euro weakness.
Yet even Conigliaro doesn't disagree necesssarily with an overall
upbeat view of the market. She predicted strong growth for IBM's
servers and PCs, among other items, and Big Blue remains on
Goldman's list of recommended stocks.
"Ironically, we believe Q3 has the making of being the first
above-expectations quarter for IBM on the top line in five quarters
when viewed on a constant currency bases," Conigliaro writes.
That didn't stop shares of IBM and its Euro-exposed peer, HP, from
losing ground this morning. On the other hand, Young's comments
may have helped keep Compaq and Gateway above water today.
Both stocks were up slightly in afternoon trading despite a dip
among broad indices.
Compaq should thrive on the market's overall growth, especially now
that the company has regained its top position in retail, Young said.
"There's clearly evidence that Compaq is executing well," he said.
The top-selling models of Compaq are all powered by chips from
Intel (Nasdaq: INTC), which won't please the Advanced Micro
Devices (NYSE: AMD) fedayeen that populate ZDNet message
boards.
"It's really a huge Intel bet that Compaq is making," Young said.
"Getting completely behind Intel on the Celeron product and the
Pentium III, rather than AMD, seems to have paid off big-time for
Compaq."
Chip brands notwithstanding, the PC industry has benefited from an
end to falling prices for the most part, Young said, though he noted
Dell (Nasdaq: DELL) is pricing its lower-end PCs aggressively. Still,
Young expects overall prices to rise for the sector. "Second half
results are likely to represent the first positive ASP trend (y/y) in more
than two years producing industry revenue growth in excess of unit
growth," Young writes.
Other than a brief bit about prices, Dell got virtually no mention
during the PaineWebber call. Among other major names, Gateway
(NYSE: GTW) remains Young's favorite stock, especially now that
Compaq and Hewlett-Packard (NYSE: HWP) no longer sell through
OfficeMax (NYSE: OMX). Young was already predicting a
measurable boost to Gateway from its store-within-a-store plans with
the office supplies retailer, even with Compaq and HP there; now
that they're gone, Gateway should get even more benefit, Young
said.
Just so the die-hards of Apple (Nasdaq: AAPL) don't feel neglected,
note that Young thinks Apple put itself in good position for
back-to-school sales. Actual revenue figures remain to be seen, but
in building inventory ahead of the prime selling months of August
and September, Apple showed some smart management, Young
believes. Still, until some sales numbers come in to provide a
demand gauge, it's hard to predict the third and fourth quarters for
Apple.
You can disagree about specific points here and there, but it looks
like many industry observers are starting to agree on one thing: PCs
are looking up for the rest of the year. It's about time. 22GO
2HRS2GO: PC names look strong to PaineWebber
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