Pip Coburn, technology strategist at UBS Warburg, nicely sums up the
situation. "The challenge is discriminating between companies with
broken fundamentals and stocks that have been crushed, but where you
can look out and have a sense of where the company will be several
years out," he says. "I wish there were more of those."
To help you pick through the rubble, we took a close look at the 20 largest
tech companies by market value. You'll find our comments -- and
recommendations -- sorted into five categories: hardware, software,
semiconductors, services and wireless communications. Our assessment
of these stocks started with the premise that an investor is willing to hold
the stocks for at least two years -- these are no short-term calls. There's
more information on the companies in the table below.
Hardware
First to Rebound?
Soundview's Arnie Berman argues that when the IT spending logjam
breaks, the first checks will be written to hardware companies. His theory
is that IT departments have postponed buying even the most basic items,
and that these items -- PCs, servers, printers and switches -- can often be
purchased at the departmental level without executive approval. (The
same isn't true of other tech products, such as servers and enterprise
software.) While Berman may be right, we fear many hardware companies
will be hampered by sluggish PC demand -- and we doubt corporate IT
spending will recover even modestly before 2003.
Even so, we're bullish on several companies in this category -- and the
one we're most enthusiastic about is Dell Computer. None of Dell's rivals
have figured out how to effectively compete with Dell's direct-sales
model. Indeed, the company's success was the obvious driver behind
Hewlett-Packard's merger with Compaq. Dell continues to gain market
share in the U.S. and abroad, it has a solid balance sheet with about $8
billion in cash, and it's zeroing in on potentially large new product areas.
The one catch? Valuation. The stock trades for 30 times expected
earnings for the January 2003 fiscal year. And PC demand is hardly
robust. Microsoft recently said it expects PC unit growth of 5% or less for
its own fiscal year ending June 2003. That suggests Dell's growth -- the
Street expects 13% higher revenue in the January 2004 fiscal year --
must be driven by market share gains and expansion into new markets.
Still, we tend to side with the bulls, who expect Dell to grow by applying its
direct-sales model to additional technology products. Steve Milunovich,
tech strategist at Merrill Lynch, says he's bullish on Dell "not so much for
its PC business, but rather for its ability to move up into routers and
storage and servers." The company also seems to be making plans to
attack the printer market, where it currently has no products of its own.
Bob Rezaee, a portfolio manager at Montgomery Asset Management,
sums it up: "Dell benefits from the commoditization of technology."
On Hewlett-Packard, our gut instinct was that the Compaq merger was a
bad idea, destined to create the next Unisys, a big, sleepy, low-growth
tech company. Nonetheless, the stock is statistically cheap -- far cheaper
than the other large- cap tech companies we looked at for this story. At a
recent 12.92, H-P now trades for about 0.5 times expected revenues for
the October 2003 fiscal year, and under 10 times projected fiscal 2003
earnings. Goldman's Conigliaro calls it "dirt cheap, the cheapest
computer company by far."
There are reasons for the low valuation, of course. Integration problems
have slowed some H-P segments; the company still must prove it can
wring the expected savings out of the merger. And the stock has been
hurt by speculation about Dell entering the printer business.
While H-P faces big challenges in PCs and other computing segments, it
remains the premier manufacturer of printers. Dell is more likely to partner
with Lexmark or Canon than it is to make its own printers; H-P bulls see
little chance of significant near-term impact on H-P's printer business.
H-P's imaging segment reported just shy of $5 billion in revenue for the
latest quarter; given a $20 billion run rate, we think the current market
value of $37 billion would almost be reasonable for the printer business
alone. By contrast, rival Lexmark trades for about 1.2 times expected
2003 revenues.
"Everyone hates [H-P Chief Executive] Carly [Fiorina], but she's not evil
incarnate," says Soundview's Arnie Berman. If this company can
ultimately generate revenues equal to the combined results of H-P and
Compaq for 2000, he notes, and can realize the expense synergies
management has promised, the company could eventually earn $2.20 a
share. "Now, the market does not believe that," Berman adds, "but the
stock clearly trades for a low multiple [based on its] earnings potential. It
can certainly move higher."
Sun Microsystems, once the dot in dot-com, is now the dot in dot-bomb.
Trading today for under $4 a share, the stock is down more than 70% this
year, and over 90% from its 2000 peak. Having dominated the server
market for Internet startups, telecom companies and financial-services
firms, Sun has been hammered by the swoon in tech spending in those
sectors and by increased competition. Kevin Landis, portfolio manager
with the San Jose, Calif.-based FirstHand Funds, says the server
business has become a "food fight," with IBM and H-P trying to under-cut
Sun's prices. "And it's working," he says. "I'm worried about them."
He's not the only one. Montgomery Asset Management's Rezaee thinks
Sun has been too slow to cut costs. "In the latest quarter, Sun had roughly
$3 billion in revenue," he says. "I don't understand how you can have $3
billion in revenue and not be profitable. They're trying to fight too many
battles -- proprietary chips, their own operating system, the software --
you can't be everything to everyone. Their business model was not
designed for standards-based pricing and gross margins. The
environment just doesn't favor Sun."
We admire Sun CEO Scott McNeally's shoot-from-the-hip style. But given
the troubled backdrop -- and shares trading for 30 times expected June
2003 fiscal year earnings -- we would avoid Sun for now. |
