To all:
I'm not sure if this has been posted already.....
By Susan Pulliam and Gary McWilliams
Staff Reporters of The Wall Street Journal
Few things shake up Wall Street these days like the prospect of a slowdown in personal-computer sales.
So when some investors got the word Thursday evening that Compaq Computer's sales for PCs in the first quarter were running below perceptions, it caused quite a stir on trading desks. The next day, technology stocks continued to reel as word spread further. "It was a major call, and it hit not only Compaq but also the entire sector," says Seth Tobias, who runs a hedge fund in New York.
Now, however, questions loom among investors and analysts: Why did only a chosen few get the word ahead of the rest of the Street? "The company should have made an announcement or said nothing," says William J. Milton, computer analyst at Brown Brothers Harriman & Co.
Mr. Milton didn't find out about the slowdown until Friday morning, when Compaq's shares were already down 16%. Later, Mr. Milton, like many analysts,cut his earnings estimate for Compaq's first quarter -- in his case, to 29 cents a share from 31 cents a share. Piper Jaffray Inc. analyst Ashok Kumar called the comments from Compaq to a small group of investors "a big time leak." Meanwhile, some traders were buzzing about big block trades at $40 in Compaq stock after the market closed Thursday, though it is unclear whether the trades were related to Compaq's disclosure.
Compaq officials defend the way the information was released. They
say the comments on PC demand were made to a group of institutional investors visiting the company's Houston headquarters with an analyst from Credit Suisse First Boston, Michael Kwatinetz, Thursday afternoon, who later put out a voice-mail message to clients saying January was looking weaker than expected. And PaineWebber analyst Don Young put out a note on Friday, after receiving a return call from the company Thursday night, lowering his estimates and downgrading the stock.
A Compaq spokesman said the company's chief financial officer commented on computer demand during the tour with investors only in response to a question from an investor about weakness in demand during the quarter. "We were agreeing with a comment made by an investor," a spokesman said. "At the time of the conversation, we did not believe that this was material (information)" It was a big deal to investors. The news rocked Compaq's shares the next day, sending its stock down 5 5/8 to 35 3/8, and hit the rest of the technology sector as well, suggesting that investors viewed the comments as more than an off-the-cuff remark by Compaq management. Indeed, some bellwether technology stocks continued to be punished yesterday, with Intel finishing the day down 2 7/8 at 117 1/16 and Compaq losing another 1 27/32 to close at 33 17/32. Traders say Dell Computer, Micron Electronics and Microsoft are among the PC makers most vulnerable to further weakness.
Mr. Kwatinetz didn't return calls for comment. Mr. Young, for his
part, says he is annoyed that he didn't hear about the demand even earlier. Compaq "didn't answer my calls" before late last week, Mr. Young fumes. "Next time, I won't call before downgrading them," he adds. It all illustrates how uneven the playing field can be for stock investors.
Of course, the little guy can forget about getting the early call from
a broker on something as important as a slowdown in demand at Compaq.
But the uneven flow of information has become an accepted mode of operation on Wall Street and even the big players can find they have been cut out of the loop when an analyst gets a piece of important information.
Securities and Exchange Commission Chairman Arthur Levitt has voiced
concerns in the past about a rise in trading on information parceled
out by companies to its favorite Wall Street analysts. In an interview on the subject last year, Mr. Levitt said he was concerned about the period "after the analysts know the news, but before the public knows it-there is a great deal of unusual trading."
Spencer Barasch, enforcement director in the Securities and Exchange Commission's Fort Worth, Texas, office, said he was unaware of the Compaq situation, "but generally speaking, if there's any question to
materiality of information the prudent thing would be to issue a press release so all the market is on even ground."
Nothing could be more paramount for Compaq, not to mention the rest
of the technology group, than the view on PC demand. Such data can be about as hard to nail as jelly to a wall, but nonetheless seems to fluctuate every couple of months, sending technology stocks flying in one direction or another. Most recently, investors were cheered in January by stronger-than-expected demand during the fourth quarter. During the summer, investors were expecting a disastrous fourth quarter, due partly to weakness in Asia and Europe.
When that didn't materialize, however, investors grew hopeful about
the first half, especially after the first part of January seemed strong,leaving some investors to conclude that some companies were pushing spending on technology related to year-2000 compliance issues into the first half.
Now, however, a couple of trends seem to be converging, analysts
say, that appear to be cutting away at the "barbell strategy" Wall Street has hoped computer makers would pull off. That's when falling margins on briskly selling consumer products are balanced by higher-margin, if slower-selling, computer
sales to businesses.
Lately, the strategy hasn't exactly been working, some analysts say.
For starters, margins at computer makers are being pinched by robust
sales of sub-$1,000 computers. Meanwhile, if Compaq is any indication, sales in the small- and medium-size business segments were soft in January, a development some analysts say is the result of business deferring purchases for the entire year because of Y2K issues. Gross margins on consumer business is about 10%, compared with 30% on high-end PC-server business.
"For the barbell strategy to work, you need both ends to come
through," says Jonathan Joseph, an analyst at Montgomery Securities.
Ryan A. Brock, an analyst at market researcher Access Media
International Inc., which specializes in small-business PC purchasing, says "PC penetration is reaching saturation among small businesses." The result: The major PC suppliers increasingly are emphasizing selling service and add-ons.
For instance, Compaq and Gateway recently have formed new online
businesses to sell peripherals, software and other add-ons.
"A lot of the infrastructure is in place now so it's important to
provide services," says Mr. Brock. Adding new fuel to Compaq's warning of a slowing, PC maker Micron said Monday it expects to report lower-than-expected results for the fiscal quarter
ending Thursday. The Nampa, Idaho, company blamed lower-than-expected
government business, pricing pressures and buyers putting off
purchases in anticipation of new offerings. It said revenue would be 6% to 9% below, and gross margins would be 1% below, the results of its last quarter. Not everyone agrees there is a problem with demand. PC Data Inc., for instance, reports that personal-computer unit sales in U.S. stores rose 22% in January from the same month a year ago. Officials of PC Data, a market-research firm in Reston, Va., add that anecdotal reports indicate sales continued to be brisk in February. "Nothing looks particularly bad," says Steve Baker, a senior hardware analyst at PC Data. Analysts at another research firm, Dataquest Inc., also report no unusual slowdowns in demand anywhere in the world. Officials at Dataquest, the San Jose, Calif., unit of Gartner Group, say they expect world-wide unit shipments of PCs to increase by an annual rate of 14% this year. That forecast represents a mild slowdown from 1998, when the shipments increased 15.5%, according to Dataquest. Dataquest analysts say they expect the slowdown to occur in the second half, due to such factors as corporations' wishing
to defer purchases until after the uncertainties of the coming Y2K change are resolved.
But PaineWebber's Mr. Young argues that the sales slowdown has been
"pretty abrupt and pretty solid." He pointed to poorer-than-expected PC results at Hewlett-Packard and Dell, whose quarters closed at the end of January, as evidence of the sudden onset. "If it was a January (ended) quarter, it was worse than the companies with a December (ended) quarter," says Mr. Young. "Dell specifically said it missed
its plan in January. It was looking for a big month in January and
didn't get it."
(END) DOW JONES NEWS 03-02-99
12:30 AM
End of News
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