Here's a must read article from Street.Com re PC makers.
Top Stories: Hard Times for Hardware
By Eric Moskowitz
Staff Reporter
7/9/98 9:50 AM ET
An inventory clearance sale, cliff-diving memory-chip prices and plunging PC average selling prices are conspiring to keep box makers weak as the industry heads into another earnings season and the lean summer months. While these companies should enjoy an initial boost from Microsoft's (MSFT:Nasdaq) Windows 98 release, pricing wars in the consumer market are driving the PC companies to the more lucrative corporate market.
"We expect to eventually have 30% of our revenues in the enterprise market," said Dell (DELL:Nasdaq) Chief Financial Officer Tom Meredith during a recent conference call, adding that the company currently gets 11% of its revenue from the enterprise arena. While direct-selling Dell shifts its long-term strategy to remain a step ahead of its competitors, the rest of the box makers have a more pressing concern: clearing out their inventory channels.
Compaq (CPQ:NYSE), IBM (IBM:NYSE) and Hewlett-Packard (HWP:NYSE) are all working the phones, trying to convince the Street that they are shipping out product faster than they can stockpile it. But not everyone is convinced.
"Compaq management is saying the company will get down to four weeks of inventory [from 10 weeks last December] by the end of June, but I'm hearing that the company still has five to six weeks of inventory," says one money manager who requested anonymity. "But it looks like they are turning this into a throwaway quarter anyway." (The manager currently has a long position in Compaq.)
Analysts, to their credit, are not buying the story either, having lowered their 1998 consensus earnings estimates 27% -- to 48 cents from 66 cents -- since May. Although the Compaq ax, Robbie Stephens analyst Dan Niles, says that investors should expect a turnaround in 1999 -- when he expects the Digital Equipment merger to kick in and help the company earn $1.55 per share -- the near-term issues are keeping investors out of the stock, which is down 10% over the last two months. Analysts following IBM and Hewlett-Packard have also shaved their earnings numbers over the last couple of months.
For the direct-sales box makers Dell and Gateway (GTW:NYSE), the outlook is a bit brighter, but these firms aren't immune to the decline in average selling prices either. Dell CFO Meredith, for one, has sought to downplay this free-fall in PC prices: "I'm not a believer in the theory that ASPs are in a death spiral," he has said many times to analysts. The numbers, however, do not lie.
The average selling price for the personal computers dropped to $1,221 in May 1998 from $1,537 in May 1997, according to the tech research firm PC Data. Interestingly, box prices over the last month dropped $30, representing a slightly more modest decline than in previous months. At this pace, ASPs should fall below the magic $1,000 level by next March. If anything, both H-P and Compaq have been aggravating the trend. They have sought to grow sales to maintain market share, even at the expense of profitability, says Roger Lanctot, a computer analyst with PC Data.
--------------------------------------------------------------------------------
A staggered PC earnings season makes it difficult to get a handle on the key companies in this space, but TSC decided to give it the old college try. Here's a rundown:
Compaq starts off earnings season before the open on July 15, and expectations could hardly be lower. The box maker earned 36 cents per share in its year-ago June quarter, and now analysts expect the company to break even in June, after earning a penny in March. It's basically another throwaway quarter for Compaq, as it sacrifices profit in order to clear out its excess PC inventory. The big question for the company is the outlook for the second half, and how painful the DEC merger will be for Compaq's rapidly shrinking labor force.
Apple (AAPL:Nasdaq) just can't seem to get over the hump. After doubling its stock price last spring, the shares have struggled to rise above 30 even as raves have come in from all corners regarding its futuristic G3 notebook and desktop iMac product launches. While many analysts believe the new products will help build back the company's revenue base (which is still eroding, albeit at a slower pace than it was last year), some aren't convinced.
"Over the years, Apple shares have been a good product-cycle trading vehicle," says Morgan Stanley analyst Gillian Munson, who has successfully played Apple's new product peaks and valleys before. But for now, he rates the stock a neutral. Nonetheless, he notes that Apple CEO and monarch Steve Jobs has done a bang-up job of turning the company around. The company will report after the close on July 15, and analysts expect it to earn 33 cents per share, reversing a 44-cent loss in its year-ago third quarter, according to First Call. (The company's fiscal year ends in September.) Speaking at the MacWorld trade show on Wednesday, Jobs not only said this would be Apple's third profitable quarter in a row, but that "Wall Street will be pleased."
The problem with some hardware companies is that they are so diverse it is hard for analysts to get a handle on them. One good example is Sun Microsystems (SUNW:Nasdaq), which reports fourth-quarter earnings after the close on July 16. Once known as just a workstation company with its Unix line of products, Sun is rapidly moving into the storage and software markets and competes with Intel (INTC:Nasdaq) in the server space. "We believe that Unix systems will hold a substantial performance lead over Intel [and Microsoft's Windows NT] for at least three or four more years," says John Jones, an analyst with Salomon Smith Barney, who rates the stock a buy. (His firm has participated in one of the firm's recent public offerings.)
The key going forward is for Sun to maintain its server dominance on the high end, as Microsoft -- which plans to release Windows NT 5.0 at the end of 1999 -- busily adds networking power to what is still a low-end product for smaller companies.
Jones recently bumped his 1999 EPS estimate to $2.80 from $2.64 because he believes Sun is undervalued and that royalties from new Java-enhanced products from Motorola (MOT:NYSE) and TCI (TCOMA:Nasdaq) should begin coming in soon. Jones' June estimate (for the company's fourth quarter) of 71 cents also happens to be the First Call consensus, versus year-ago earnings of 61 cents.
Gateway this quarter has launched its biggest advertising campaign ever around YourWare -- a more customized way of selling computers and computer peripherals to the consumer -- and this could impact earnings when the company reports after the close on July 23. Analysts, however, continue to see earnings improvement for the June (second) quarter. According to First Call, the analyst consensus calls for earnings of 43 cents per share, versus 36 cents in the year-ago quarter. Another thing to watch: revenue growth. Annual revenue growth -- as tends to happen with any fast-growing outfit -- has slipped to 24% from 56% in 1994, flattening out over the last four quarters. Any revenue-growth figure below the 22% to 25% range could be a signal of weakness going forward
Hewlett-Packard reports its second-quarter earnings numbers at 4 p.m. EDT Aug. 17. Unbelievably, after all the troubles the company has been having this year, H-P could still show an earnings improvement over its year-ago July quarter, when it earned 58 cents per share. This quarter, the company is expected to earn 63 cents. One caveat: The late earnings date gives H-P ample time to preannounce again. Last quarter, the company warned days before its April earnings disclosure that it would miss analysts' expectations of 77 cents by 12 cents. The stock has since fallen to 59 from 81.
While Compaq traditionally opens up the box maker's earnings season, Dell usually closes it -- with a bang. The box maker reports after the close Aug. 18. Analysts expect Dell to earn 46 cents per share, versus 29 cents in its year-ago July quarter. Since the company earned 44 cents in March, it's pretty safe to say that Dell will meet expectations. The test for the company will be whether it can meet the whisper number, yet to be determined. One number to keep an eye on: European sales growth. In the company's July 1 conference call, Meredith hinted that European sales should be "very robust" in the second half of this year due to better-than-expected transactional business in the June quarter.
Back in May, International Data Corp. analyst Roger Kay warned that Dell's April quarter would be its last positive one for a while. "ASP declines will finally impact the company's earnings," he warned. Don't be surprised, however, if Dell figures out a way to stay above the curve for a bit longer.
|
