Computer makers results seen solid, economy nags
By Eric Auchard
NEW YORK, Oct 11 (Reuters) - Leading computer makers are expected to show solid growth in quarterly financial results this month, but that is unlikely to mollify investors who fear the world economy is headed for a technology spending slowdown in 1999.
In the short-run, computer firms are generally seen meeting or beating earnings expectations as they report September quarter results during the next two weeks, thanks to a seasonal sales upswing that typically begins each year in the third quarter and continues into the holiday season.
Many computer suppliers can boast of refreshed third quarter product lines, increasing profit margins and an end to the glut of personal computer inventory that throttled results at several top manufacturers earlier this year.
The fourth quarter should see further acceleration of these trends, most companies are expected to say during meetings with Wall Street analysts scheduled to be held after each company's earnings report.
But it's what computer companies cannot see so clearly that has investors worried -- the stocks have been bloodied in recent weeks as gee-whiz optimism about inexorable growth has vanished, at least for now, with executives waiting to see how corporate spending plans play out.
''Investors are looking out beyond the next two quarters to 1999,'' said Salomon Smith Barney analyst Rich Gardner. ''They are concerned about the future.''
It's what Bear Stearns senior computer analyst Andrew Neff refers to as the question of the moment for technology investors: ''What is the impact of the global economic turmoil on computer spending?''
In uncertain times, Neff is telling investors to focus on stocks that are beginning to benefit from a hot product cycle, such as IBM with its new mainframe line-up, or Apple Computer Inc. with its sleek iMac consumer machines, both introduced in August.
Or look for companies with a compelling investment theme, such as Dell with its highly competitive direct-distribution strategy, which continues to take market share from other PC makers, he said.
Wall Street hungrily awaits Apple's fourth quarter earnings report due out on Wednesday afternoon.
Last week, the company announced that Chief Executive Steve Jobs would reveal Apple earnings during a special meeting set for October 14 at 2 p.m. EDT (1800GMT), at which the company will also reveal sales statistics for the iMac and unveil the latest version of its Macintosh operating system.
''It has to be good news,'' Gardner said of the company's move to announce earnings prior to the close of trading on Wednesday, giving the stock time to react. Apple traditionally reports its earnings after normal trading has finished.
Compaq officials have asked Wall Street to consider the company's third quarter ''transitional'' as it focuses on the integration of its $8.4 billion Digital acquisition in June.
They have guided analysts to expect earnings for the quarter of 6.0 cents per share. Comparisons with a year ago are confused by the combination of the merged companies' results.
But Compaq appears ready to report continued progress in holding down inventory levels, a problem that crippled its earnings during the first half of the year.
On Friday, CEO Eckhard Pfeiffer said in a television interview that excess PC inventory had been cut to the ''lowest levels in the history of our company.'' In the same CNBC-TV program, Pfeiffer also said that the Digital acquisition was proceeding ''perfectly on schedule.''
There are some limited concerns about Compaq's revenue growth in the third quarter, owing to concerns about product shortages, Soundview Technology Group analyst Mark Specker said. The median revenue estimate among Wall Street analysts is $9.1 to $9.2 billion for the quarter.
He said there were signs that Compaq had had difficulties building enough computers to meet demand, especially Intel chip-based servers, which are a key profit-source. However, a shortfall here leaves room for Compaq to make up this business in the fourth quarter, he noted.
IBM's growth engines continued to blast during the third quarter, several analysts agreed. IBM's fast-growing computer services business, which accounts for about one third of corporate revenues, announced a string of billion-dollar-plus contracts and renewals.
IBM's highly anticipated G5-series mainframes first shipped in August, leaving little time for them to have much effect on third quarter results, but at least ending the period of flat growth in this key, highly profitable business area.
Solid performance in other areas could also help offset slower-growing businesses and the threat posed by world economic turmoil to revenues from IBM's multinational corporate customer base.
ABN Amro analyst David Wu said he expected a strong report from Sun Microsystems, noting that the company has made gains in the market for computers used to manage large enterprises, moving into the top ranks with IBM and Hewlett-Packard while leaving Compaq's Digital unit behind in the second-tier ranks.
But Sun could be exposed by its relatively large dependence on sales to Wall Street brokerages, which are sharply cutting new spending to compensate for last quarter's trading losses.
Rational arguments aside, Neff said that with the current extreme jitters among investors, ''stocks could remain volatile and susceptible to anecdotal reports of companies cutting back (spending).''
Gardner sees selected opportunities in the sector. ''With the market down so much, we could see some pops in selected stocks,'' he said, pointing in particular to Apple Computer Inc. and Compaq Computer Corp.
''At the minimum, we have a quarter coming up that's good,'' Wu said of third quarter financial reports. ''Whether it's more than just seasonal strength, we still don't know.''
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