Taken from this weeks Barrons "The Trader" column:
Expect Choppy Waters For PC Makers in 1997
Strange things are going on in personal computer stocks. On the one hand, analysts contend corporate PC demand remains solid. On the other, there's strong evidence of soft consumer sales, despite the recent Journal story on the subject. Not only were there disappointing reports from Circuit City and Micro Warehouse last week, but Best Buy, another electronics retailer, said it lost money in its fiscal third quarter, ended Nov. 30, owing to the writedown of some personal computer inventories.
Best Buy's troubles, which put the company at least temporarily in violation of its bank borrowing agreements, highlights a potentially sticky issue for the PC business - the debut next month of Intel's new MMX microprocessor. The MMX will extend the Pentium line, providing faster performance and, more importantly, higher-quality video and audio. Analysts say retail PC sales have been particularly weak for high-end machines, in part because buyers who want the biggest and best seem inclined to wait for MMX models to hit stores in early 1997.
Mark Specker, a San Francisco-based PC analyst with SoundView Financial, contributed to last week's PC-stock mania, lifting his short-term rating on Compaq to ``buy'' from ``hold.'' The recommendation reflects a softening in Compaq's stock, and a slightly revised gross margin estimate. Specker, a fan of the PC industry, already had a short-term buy on Gateway 2000, and long-term buy ratings on Compaq and Dell.
Nonetheless, Specker warns that PC makers will face choppy waters in 1997. For one thing, the industry faces a pair of key product transitions. Intel next year will introduce not just the MMX chip but also Klamath, a multimedia version of its Pentium Pro microprocessor. Specker notes that MMX chips should be widely available early in the year, but that Klamath-based hardware will be hard to find before the third quarter. Specker worries ``there could be some push-off in corporate demand'' by buyers waiting for the newer machines.
A second issue, Specker says, is Compaq's plan to fine-tune its distribution system to make it more like Dell's, with greater ability to build PC hardware to order. Compaq's Channel 2000 initiative should allow it to cut down on the number of individual models and boost inventory turns. If it works, Specker says, the result will be ``nothing but goodness.'' Except for Dell, that is. One reason for Specker's short-term neutral stance on Dell is his expectation that Compaq will soon release more details on the subject.
Lastly, Specker predicts the PC industry will soon feel the effects of the emergence of ``sealed-system'' personal computers, better known as network computers, or NCs. ``A lot of companies will buy some of these cost-reduced PCs for some of what they do,'' he predicts. As that begins to happen, he says, pricing pressures will mount. Several years down the road - Christmas 1999, perhaps - Specker expects to see lower-cost, reduced-function machines appearing in the consumer market.
Last week in this space, we took note of the logic-defying rise in Micron Technology, the Boise-based maker of computer memories. The shares have since retreated 4 5/8, to 30 7/8. The company last week reported sharply lower earnings for its fiscal first quarter - 10 cents a share, down from $1.51, due largely to a mammoth plunge in memory chip prices. But that's old news. What really upset the bulls was an earnings-estimate reduction by Merrill Lynch, which has been one of Micron's biggest enthusiasts. Merrill snipped its fiscal 1997 estimate to $1.50 a share, from $1.95.
(IMHO, Circuit City, Best Buy, etc., are no longer accurate indicators of PC sales. As I've stated earlier, my own anecdotal observations are people buying from the likes od Dell and Gateway, and corporations such as the one I work for buying from Compaq by the truckload. Still, time will tell.)
Paul |
