Love the optimism...not.
(Although I agree immensely with the statement in bold.)
--
Don't Be Bowled Over By
Compaq's Numbers
Tara Murphy, Forbes.com, 01.25.01, 12:35 PM ET
NEW YORK - You're a PC investor that stuck out the frustrating
fourth-quarter confessions, only to have your confidence restored by
better-than-expected fourth-quarter reports from Compaq Computer and
IBM. Pat yourself on the back because you have a stomach of steel.
Before you congratulate yourself too much, though, you might want to
consider the circumstances that led to this renewed optimism. "We were
expecting a poor showing, and we're getting good reports on lower
expectations," says Bill Shope, PC analyst at ABN Amro. True, Compaq
(nyse: CPQ)surprised the market on Tuesday with a 30-cent profit in the
fourth quarter, topping analyst estimates of 28 cents a share. Those
estimates had been revised downward, though.
Be aware: Lehman Brothers is excluding PC stocks from the firm's own
stock portfolio, according to Jeffrey Applegate, Lehman's chief market
analyst. "The earnings growth of the past won't be repeated in the future.
Internet access isn't going to be as PC dependant as it has been in the
past," says Applegate, describing why his firm is bearish on the sector.
Waning demand and inventory buildup is still a problem for the PC
industry. Compaq had a blowout yesterday, but Shope says that the
company's guidance for flat sales growth in the first quarter and 6% to 8%
revenue growth in 2001 suggests tough times ahead. This may not be
enough to counter positive fourth-quarter results at the company's
enterprise server and software business lines.
"Compaq is doing well, considering the situation, but it doesn't mean that
PC problems are behind us. It's going to be a rough first half," says
Shope.
The situation might not be as dire as it sounds, though. "Stock selection is
very important because it's not a fixed-cost industry where stocks move up
and down in cycles. Don't buy a basket of PC stocks, pick the best
business model," Shope says.
Shope's top pick: Dell Computer (nasdaq: DELL). He says its direct
distributional model gives it the best defense in a market environment
that's tainted by pricing pressure and soft demand.
Ed Hemmelgarn, hedge fund manager at Shaker Investments, says
although the PC industry could warm up with the acceleration of Window
2000, it won't be as hot as other segments of technology. "I think the PC
business, at least domestically, is a much more mature business, so I
think that there are better places to make money like
communications-related stocks."
He points to the incorporation of Broadcom (nasdaq: BRCM) technology
in Gateway's (nyse: GTW) PCs. Though this might seem to offer a
competitive advantage to Gateway, it's a better play for Broadcom, which is
supplying chips that ease digital subscriber line or high-speed modem
connections.
Uncertainty over PC growth rates could create some bargains. "They've
certainly come down in price," says Hemmelgarn, "but I'm not so sure that
I would describe it as a value play yet."
Dell still sells at 30 times cash flow. Better value plays: Both Compaq and
Gateway are at the lower end of their historic price-to-earnings ratios. |
