Friday February 26, 7:51 pm Eastern Time
Investors shed PC stocks on fears of
supply glut
(Recasts, closing stock prices, adds detail, company
comments)
By Eric Auchard
NEW YORK, Feb 26 (Reuters) - Investors dumped personal
computer stocks on Friday amid fears a build-up of PC inventory could stifle first quarter growth --
and repeat a cycle the industry had vowed just one year ago would never happen again.
Friday's sell-off was sparked after Compaq Computer Corp. (NYSE:CPQ - news), the world's
largest maker of personal computers, said industry sales of commercial PCs had been soft for the
first six weeks of the first quarter in North America and Europe.
Wall Street analysts saw Compaq's weakness as further evidence of a build-up of left-over PC
inventory from the heavy production cycle that occurred for most major PC makers in the final
quarter of 1998.
Two brokerages advised investors to avoid buying new shares of Compaq. Analysts at other firms
slashed their earnings estimates for Compaq's first quarter results.
''In this environment, it's shoot-first and ask questions later,'' said one analyst of the queasy overall
market sentiment that fueled wild-selling of computer stocks, with nearly 75 million shares trading
hands.
Compaq stock closed down $5.62 at $35.37, Gateway Inc. (NYSE:GTW - news) lost $7.44 to
$72.69, Hewlett-Packard Co. (NYSE:HWP - news) gave back $4.75 to $66.44 and IBM
(NYSE:IBM - news) fell $3.87 to $169.75. All prices refer to composite U.S. stock exchange
trading.
Dell Computer Corp. (Nasdaq:DELL - news) lost only $1.62 to close at $80.12 in Nasdaq trading,
but the stock has been sent reeling since it reported a slackening in its normally torrid growth rate
two weeks ago.
Inevitably, Intel Corp. (Nasdaq:INTC - news), maker of the microprocessors that form the core of
most PCs, was swept along in the downdraft because it is seen on Wall Street as a proxy for the
sale of PCs. Its stock fell $7.81 to $119.94 in heavy Nasdaq trading action of 42 million shares.
''It's a zero-sum game,'' said Ashok Kumar, a PC analyst at brokerage Pipper Jaffray of
Minneapolis.
''If one company ends up being the party pooper it affects the whole landscape,'' he said of
Compaq sales weakness and the rising likelihood of a price war to slash backlogs of older
products," he said.
The industry must make way for newer computers first released today that are based on Intel
Corp.'s just released, next-generation microprocessor, the Pentium III. Ironically, most of the
industry was absorbed Friday with their announcements of new Pentium III PC models.
To analysts, it sounded like a replay of last year.
In the first quarter of 1998, investors learned the profits PC makers reported in the fourth quarter
had been bolstered by excessive PC shipments at the end of 1997, which then sat unsold on
distributors shelves, creating months of backlog.
That build-up led to a log-jam across the PC industry in the first-half of 1999 and a round of bruising
price cuts to clear inventory. Earnings results at most major PC makers were crippled, and their
stocks suffered as well.
''It's almost like deja vu,'' Kumar said. ''In the December quarter, Compaq stuffed the channel to
make the numbers'' he said, referring to Wall Street's earnings expectations for the company's fourth
quarter.
But Compaq spokesman Jim Finlaw denied that weak sales of commercial PCs during the first six
weeks of 1999 had spurred an industry oversupply glut. ''Inventory is doing well,'' he said.
''We saw slow demand in North and Europe,'' Finlaw said of January sales. This was partially offset
by what he said was strong demand in the Asia-Pacific region, including China and Japan, and
''okay'' demand in Latin America.
The spokesman was relating comments Compaq Chief Financial Officer Earl Mason first made
Thursday in response to a question from a group of investors visiting the company's Houston
headquarters.
Mike Kwatinetz, a CS First Boston analyst who was among the group visiting Compaq Thursday
had said in a research note published Friday that weak demand among Compaq's network of PC
distributors may be a factor in the recent soft PC sales.
He wrote: ''Since Compaq appears to have had a shortfall in January, the question arises: ''How is
the industry doing?'' In retrospect, Dell and HP's slight revenue shortfalls may have been more of an
industry issue than we previously believed.''
''This is a tech wreck,'' a senior equity trader at Dresdner Kleinwort Benson said of Friday's
debacle. ''What analysts were saying about Dell, with slower growth prospects, seems to also be
affecting these other computer stocks, like Compaq.''
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