<< I believe Intel will run up to 100.
Then it will fall back down to 90.
And then it will do it again. >>
I agree but longer term see para 3 and 6.
Business Wire - September 25, 1997 16:54
MONTGOMERY-SECURITIES %CALIFORNIA %NEW-YORK
%MASSACHUSETTS %COMPUTERS %ELECTRONICS %COMED
%BANKING %TRADESHOW V%BW P%BW
SAN FRANCISCO--(BUSINESS WIRE)--Sept. 25, 1997--Personal computer
makers who succeed in the lucrative server and portable markets will come to dominate the PC industry, relegating the rest to selling low-margin commodity desktops, according to Kurt King, PC industry analyst for Montgomery Securities.
"Product mix will increasingly determine the winners and losers in the PC industry," King said. King made his comments at the Montgomery Securities 27th Annual Investment Conference, the largest annual investment conference devoted exclusively to growth stocks, which is running now through Sept. 26. More than 1,000 institutional investors are attending the conference, which features 235 growth companies and 25 analyst-led workshops. Among the PC manufacturers making presentations at the conference are Dell Computer, Hewlett-Packard Co., Gateway 2000 and Micron Electronics.
King said that concerns about significant downturns in PC demand are unfounded,because over the past 10 years, PC industry revenues have grown consistently at a rate of 15 percent to 25 percent per year in the face of such concerns. He sees future industry growth being driven by increased penetration of PCs internationally as well as in the U.S., and by the continued upgrading of PCs as more powerful models come on the market. As a result, King said, "I expect the future of the PC market to look a lot like the last, despite ever-changing investor sentiments."
However, King said that there is a growing dichotomy being caused by the commoditization of the desktop PC market, in which, he said, "anyone with a screwdriver" can build a desktop PC. As a result, gross margins on desktops have fallen to between 10 percent and 15 percent from the 35 percent levels seen as recently as five years ago.
On the other hand, the gross margin on high-end servers approaches 50 percent and the gross margin on high-end portables is approximately 30 percent. These machines require more R&D to develop, and their functionality isn't as tied to chips provided by Intel Corp as desktops. They can be sold based not only on price but also on service, support and vendor reputation. In addition, the top five players in the high-end server and portable markets collectively hold a dominant market share, fostering stronger profit margins than in the fragmented desktop market.
Another industry trend that will separate winners from losers is the imminent arrival of the "Wintel" standard in the enterprise. King expects the release and acceptance of Windows NT 5.0 to be the driving force for this conversion, which he is forecasting will become a significant opportunity for PC manufacturers in 1999. King expects that the "Wintel in the enterprise" battle will determine the winners in the overall PC wars,as the winners will be further able to offset commodity PC margins with healthier margins derived from sales of enterprise servers.
King named four companies as likely winners in this product mix environment: Compaq Computer, Hewlett-Packard, IBM and Dell Computer. He said a fifth, undetermined player may join these four to control upwards of 50 percent of the PC market by 2000.
King also provided investors with three stock picks based on his analysis. Compaq, he said, is "by far the greatest beneficiary of the product mix shifts and is now perceived as the 'safe choice' among risk-averse information systems managers." Dell Computer,King said, "has a smart management team that will not stand still." The company's sales should continue to grow at two-to-three times the industry average, King said, as Dell rapidly gains market share among corporate customers with its fast-growing server products.
King said that despite huge price gains for these two stocks -- Dell is up 1031 percent over the last 18 months, while Compaq is up 355 percent -- they are both still "cheap" based on an analysis of their current price/earning ratio compared to their expected growth rates. Using King's current 1998 earnings estimate of $3.25 a share for Dell, with a growth rate of 32 percent and a P/E of 31, Dell's P/E to growth rate is 98 percent. Similarly, using current estimates for Compaq's performance, Compaq is currently selling at a P/E-to-growth rate of 104 percent. By comparison, the S&P 500's current 1998 P/E-to-growth rate is 285 percent.
King's third stock pick was Apex PC Solutions, a small-cap company that makes embedded switches and server cabinets and is a sole-source supplier to Compaq, Hewlett-Packard and Dell Computer. King said Apex is a "pure play on PC server growth." The company has posted 69 percent revenue growth during the first half of 1997, with 45 percent gross margins and operating income of 26.1 percent.
Montgomery Securities is one of the nation's premier investment banking and institutional brokerage firms. Dedicated to growth companies, Montgomery combines focus and specialization in research and investment banking with bulge-bracket capabilities in global distribution and large-block trading. Montgomery has offices in San Francisco, New York and Boston. Montgomery has agreed to be acquired by NationsBank Corporation and will be merged with NationsBanc Capital Markets, Inc. to form NationsBanc Montgomery Securities Inc.
CONTACT: Montgomery Securities, San Francisco
Jennifer Smith, 415/249-5968
jasmith@montgomery.com |
