Some reading material:
H
PREVIEW SEPTEMBER PC MONTHLY MONITOR REPORT
08:13am EDT 6-Oct-99 Prudential Securities (K.ALEXY) AAPL BBY CC
PREVIEW SEPTEMBER PC MONTHLY MONITOR REPORT
R E S E A R C H N O T E S October 6, 1999
Subject: PC HARDWARE INDUSTRIES
PC INDUSTRY OPINION
=====================
Current: Strong Buy
Analyst: Kimberly Alexy
Andrew Saland RISK: High
========================================================================
o PC vendor and channel checks during the month suggest that sales momentum in
the corporate market remained strong through the month of September - indicating
a strong close to the 3Q. The strength remains largely specific to North
America and Asia/Pac while demand in Europe remains sluggish. At this point,
checks continue to indicate continued strength into Q4.
o Channel inventory levels were mixed - with some distributors noting inventory
increases on weaker sales (see below) while others continued to post declines.
Overall, we believe aggregate inventory levels remained relatively flat
sequentially.
o Consumer PC demand was generally in-line with expectations. ASPs declined a
modest 3.6% and inventory levels remained lean.
o We believe the Taiwan quake will trigger a 1-2 week supply disruption during
October. At this point, lead times on desktops remain relatively normal,
notebook leads have modestly lengthened and certain high-end graphics products
have been pushed out. However, we expect vendors will able to fulfill backlog
during the December quarter. With an October quarter end, Dell's ability to
fulfill demand is less certain although at this time we believe the company
continues to track to plan.
o In aggregate, we believe PC demand trends during the quarter were slightly
stronger than expected. We continue to recommend purchase of Dell and Gateway
shares. We remain neutral on the PC reseller stocks.
o HDD vendors continue to suffer from aggressive pricing pressures at OEM.
Expectations are for minimal price improvement in the December quarter.
However, WD's product stumble may drive incremental unit volumes for SEG and
Maxtor - creating the possibility for another mini-rally during the quarter.
==============================================================================
PC Demand Themes
After re-accelerating in June, corporate PC momentum has held through the third
quarter with corporate and channel checks noting a strong close to the quarter.
Overall, we believe 3Q closed slightly stronger than seasonally expected as a
result of both corporate and consumer momentum. We believe Dell and Gateway
continued to enjoy strong share gains while Compaq lost modest market share - as
anticipated - following the implementation of its DAP program.
Much of the strength remains specific to North America and Asia Pacific while
demand in Europe remains sluggish - albeit, in part, as a result of seasonal
trends.
We believe the re-acceleration in corporate PC demand - first noted in June -
has been driven by pent up demand following a weaker than expected 1H. Not only
has momentum held through Q3 but the majority of our checks remain optimistic
about the prospects for Q4 as well.
Following a strong recovery in PC stocks in CQ3 as sentiment improved around end
demand, concerns have -- ironically - now shifted from demand to supply. The
Taiwan quake has caused uncertainty about lead times on certain components and
overall availability of finished product. Taiwan accounts for approximately 10%
of the world's chip supply,35% of chip sets, 60% of chips used in modems and
networking cards and 80% of graphics chips.
We believe that the quake has triggered a 1-2 week disruption throughout much of
the supply chain. However, notebook and PCB suppliers expect to compensate for
the shortfall by running additional overtime and expect to catch up relatively
quickly. Leading fab companies TSMC and UMC are now both up at 100% production
as of last Friday and Monday, respectively. And many graphics and networking
suppliers had ample inventory on hand to cover production delays.
Now, with power 100% restored and production fully back on line, we believe the
impact from the quake is more modest than initially expected. We believe the
biggest risk to component supply is related to the graphics suppliers who rely
on the Taiwanese fab companies. In general, inventories of graphics suppliers
have been high, at 4 weeks+ in many cases, however, supplies on new products
will be constrained - likely pushing lead times out for high-end graphics chips
by several weeks.
In general, our recent checks with vendors are still quoting normal lead times
across most product lines. However, our checks indicate that certain high-end
products using new graphics chips will likely be delayed by several weeks.
Notebook leads are also slightly longer than normal. Albeit, we expect lead
times will work back down by the end of Q4.
Dell is the PC vendor with the highest risk in our view given its October
quarter-end. However, at this time, we continue to believe that risk to Q4 is
minimal given the rapid ramp of the component suppliers and Dell's leverage as a
leading Tier-1 supplier. We expect more updates during the company's Fall
analyst meeting on Thursday.
Even prior to the quake, component costs were firming and in some cases (i.e.
memory prices) increasing. The aggregate basket of components continues to
decline, however, despite selected increases in certain areas. As a result, we
believe vendors are not dropping prices as rapidly - leading to an overall
moderation in the rate of ASP declines. We do not believe vendors are suffering
from a margin squeeze.
PC availability remains adequate in all product areas except notebook PCs. We
believe the quake has further lengthened lead times in this area. No surpluses
of PC products were reported.
Inventory levels of finished product in the PC channel remained relatively
stable sequentially at approximately 3.5-4 weeks with some reports noting modest
increases while others noted decreases. We believe certain increases have
occurred as select distributors encountered severe pricing pressure and elected
to occasionally walk from aggressive business.
In aggregate, we believe that the September quarter closed slightly stronger
than seasonally expected as a result of the acceleration in corporate and
consumer sales. We continue to recommend purchase of Dell and Gateway shares.
We believe Compaq shares, however, will remain under near-term pressure until
there is improved visibility of execution by the new management team.
========================================================================
PC Channel Themes
Corporate channel checks generally noted a strong close to the September quarter
with the U.S. again the reason for strength. Aggressive pricing pressures in
distribution, however, has dampened revenue growth - and more significantly,
pressured front-end margins during the quarter. We believe increased price
aggressiveness in the U.S. resulted from heightened competition to win Compaq
DAP business. Heightened price competition caused some distributors to walk
from business - negatively impacting revenues and reducing their ability to
achieve the ever-critical back-end rebates.
In addition and further compounding the problem, vendors have been continuing to
tighten terms and reduce back-end margins. As a result, many distributors were
pressured on both the front and back-end. Both Ingram Micro and Merisel
officially pre-announced as a result.
Longer-term, we expect leading Tier-1 distributors will benefit from a continued
trend towards channel and vendor consolidation. However, near-term we do not
anticipate a recovery in the stocks until margin pressures are alleviated. Nor
do we see any catalyst for the PC resellers.
PC Retail Survey Highlights
Several retailers continue to cite lackluster interest levels driven by ISP
rebate plans, with the exception being Best Buy who offers an instant, in-store
rebate for purchasers who register on-site. Still, our surveys indicate the
programs continue to generate some incremental sales and increased foot traffic.
In September, survey consumer PC demand levels were in-line - relative to both
internal expectations and seasonal trends. No specific reasons were cited for
the weakness and slowed momentum. Signs of strength were attributed to seasonal
back-to-school sales, and signs of weakness were attributed to seasonal slowing
after bts sales tapered off.
Surveys continue to suggest that sales of Apple iMacs remain strong while sales
of eMachines' eOne (Wintel-based iMac clone) were also strong, though slowing
somewhat from the initial launch in August. Notably, the eOne is still
available for purchase in Circuit City stores we surveyed, despite the
injunction granted Apple in early September against the manufacturer. Order
rates for Apple's new iBook indicated strong consumer response, as were G4 order
levels. IBM consumer PC sales were noted as stronger this month, including
interest levels and order rates in anticipation of the Athlon-outfitted IBM PCs.
ASP erosion seems to have shown signs of slowing through September, however. On
a weighted basis, PC ASPs on the retail level were $1336, compared to $1385 in
August, $1284 in July, and $1327 in June. Best-selling brands in all price
ranges continued to be Hewlett-Packard and Compaq, with the exception of
eMachines in the low-end.
June July August September
High-End $2140 $2105 $2180 $2186
Mid-range $1301 $1294 $1321 $1308
Low-end $ 854 $ 903 $ 900 $ 861
Data Storage Themes
During the month, HDD vendors continued to enjoy strong demand trends throughout
the quarter. However, the pricing environment remained aggressive - though was
less aggressive sequentially, as expected. Positively, HDD vendors did not
have to re-price to OEMs during the quarter - unlike in Q2 in which multiple
re-pricings occurred during the final month of the quarter. Overall, we believe
blended desktop drive ASPs declined 5% sequentially vs. 12-15% in the June
quarter, in-line with our expectations.
We believe Seagate, Quantum HDD and Maxtor may have all gained incremental share
at the expense of WD's stumble during the quarter. We believe there is a
similar opportunity next quarter for these vendors to gain share. Specifically,
we believe WD's CQ3 stumble (times two) not only impacts its 6.8GB/platter
sales in the September and December quarters but also may have implications for
OEM share loss on its 9 and 10GB programs for the December and March quarters.
We expect PC OEMs will be increasingly reluctant to rely on WD as a primary
supplier on its next generation programs - creating an opportunity for
incremental unit volumes for other HDD vendors.
As a result, we believe our unit growth assumptions for Seagate, Maxtor and
Quantum HDD may prove conservative. We are not expecting - however -
incremental unit strength to lead to a significant change in our ASP assumptions
in CQ4. Specifically, prior to the WD stumbles, Q4 OEM pricing had largely
already been set. Our checks indicated no significant moderation in the rate of
price erosion between the September and December quarters. Further, given
ample supply, we find it unlikely that HDD vendors will be able to successfully
RAISE OEM pricing inter-quarter.
In summary, we believe WD's stumble could trigger a mini-rally in HDD stocks in
Q4. However, we do not expect an environment comparable to Q498 in which the
stocks doubled and tripled during the quarter. Incremental unit volume is NOT
sufficient - we would need to see some material improvement in pricing as well.
And given that HDD vendors are aware of the WD product stumble and are ramping
next generation offerings in October, we would expect the group to factor this
into their build plans. As a result, we believe that its unlikely that drive
companies would go on allocation during the quarter. We remain neutral on the
group.
Apple (AAPL, $67 15/16, Hold); Best Buy (BBY, $61 1/4, rated Accumulate by Harry
Katica); Circuit City (CC, $42 13/16, rated Accumulate by Harry Katica); Compaq
(CPQ, $22 1/4, Strong Buy); Compucom (CMPC, $3 23/32, Accumulate); Dell (DELL,
$43 13/16, Strong Buy/SBI); Gateway (GTW, $50 3/4, Strong Buy); Hewlett Packard
(HWP, $83 5/8, not rated); Inacom (ICO, $8 11/16, Hold); Ingram-Micro (IM, $13
1/16, not rated); International Business Machines (IBM, $122, not rated); Maxtor
(MXTR, $6 5/16, Hold); Merisel (MSEL, $1 ®, not rated); MicroAge (MICA, $2 1/8,
not rated); Micron Electronics (MUEI, $11 1/4, Accumulate); Network Appliance
(NTAP, $78 5/16, Strong Buy); Quantum HDD (HDD, $6 5/8, Hold); Quantum DSS (DSS,
$13 15/16, Strong Buy); Seagate Technology (SEG, $31 3/8, Hold); Tech Data
(TECD, $24 5/8, not rated); Western Digital (WDC, $3 7/8, Hold).
|
