I am sure you have all seen this, but here it is for those who have not.
How Bad Are Computer Industry's Sales Problems?
by Jed Graham
First Dell Computer and Hewlett-Packard fell short of their fiscal
fourth-quarter revenue numbers. Now Compaq Computer is telling industry
analysts that some of their revenue projections for its first quarter
are too optimistic.
The latest revelations led CS First Boston analyst Michael Kwatinetz to
pose this question in a Friday research report: "Since Compaq appears to
have had a shortfall in January, the question arises: "How is the
industry doing?"
For the past three weeks, Wall Street has been reigning in its
expectations for the PC sector. Yet few convincing signs of weakness
have appeared - except in the stocks.
Compaq shares tumbled 5-5/8 to 35-3/8 on Friday. The No.1 PC maker's
stock has now fallen 30% from its January 27th high. Investors have
soured on DELL, one of the best stocks of the 1990s. It's lost 27% since
Feb. 1.
The weakness has extended to the entire PC hardware sector. Intel slid
7-13/16 to 199-15/16 on heavy volume, despite the much-awaited release
of its Pentium III processor.
Other component makers also took a beating amid concerns over pricing
and PC demand. Micron Technology sank 9-3/16 to 57-5/8, Texas
Instruments 7-1/16 to 89-3/16, Altera 6-3/8 to 48-5/8 and Sanmina 5-5/16
to 52-1/4. Chip-equipment makers came under even heavier pressure.
It's not surprising that the stocks should pull back after their strong
advance from October to January. But sentiment has clearly turned
against these hardware-related sectors more than the rest of the market.
Compaq Estimates Cut
Friday's sharp sell-off came after CS First Boston and Merrill Lynch cut
earnings estimates for Compaq. Merrill Lynch's Steve Milunovich says the
company indicated PC sales have been soft to small and midsize
businesses.
Earlier in the week, Milunovich said in a research note that PC industry
revenue growth had slowed to 3% to 5% a year due to falling computer
prices. (this is what I originally thought Cramer was referring to in
his column) Dell's efforts to grow several times faster than the
industry rate "will prove hard to achieve, perhaps resulting in pricing
pressures."
Kwatinetz cut his first-quarter revenue estimates on Compaq to $9.8
billion from $10 billion and his profit estimate by a nickel to 31 cents
a share. First Call's consensus forecast had been 35 cents.
By late afternoon, First Call reported that 10 analysts cut their
earnings outlook on Compaq, a number of them who were already below the
consensus view.
But some industry analysts say the signs of weakness don't appear too
troubling.
Compaq's apparent revenue shortfall is more a result of inflated
forecasts, says Piper Jaffray analyst Ashok Kumar. Compaq's late
fourth-quarter shipments helped it make its numbers for that quarter but
may have heightened expectations for the current quarter.
Kumar, who was among the first analysts to warn that Dell's revenue
would fall short, says he's not adjusting his revenue forecast of $9.6
billion for Compaq and believes the company has a chance to meet
estimates.
One factor that could lead the company to come up short is the weakness
in Brazil's currency and economy, Kumar notes. A weakening global
economy and a decline in computer hardware spending leading up to 2000
could present problems later in the year.
One Month Trend?
Lighter-than-expected sales in a single month didn't shake Wasserstein
Perella Securities analyst Stephen Dube's belief that the PC industry is
healthy.
"I don't think there are any signs of serious trouble in the industry,"
he said. But he added that the best years for the industry may be behind
it.
Still Hewlett-Packard and IBM appear inexpensive at current prices with
a rebound in their businesses from a weak 1998, he says.
Another reason Kumar isn't convinced of significant woes in the PC
industry is that Intel, a tech bellwether, hasn't cut its projections
for the quarter.
On Friday, market research firm PC Data released a report showing 43.9%
of PCs sold in the U.S. retail market in January came with AMD's K6
chip, overtaking Intel's 40.3% share for the first time. But Intel said
last month that it would move aggressively to regain its lead in this
market.
Microsoft is another tech bellwether that hasn't reduced estimates, says
International Data Corp. analyst Christine Arrington, who is expecting
strong sales for it and Intel in the first half of the year.
Intel's Pentium III release may be one reason January sales didn't get
off to a robust start and could help sales going forward, she says.
PC sales are usually stronger in the second half of the year. But that
may shift to the first six months of this year as companies work to
become Year 2000 compliant, Arrington says.
"Companies don't want to be working to install new equipment as the
deadline approaches." |
