Hi Kemble!...and from the April 2000 issue of Kiplinger's... :)Leigh
No matter how you slice it, Dell Computer will continue to win big because of the Internet. The company suffered a bad fourth quarter last year because of a shortage of Intel chips and a falloff in business orders. Dell has warned analysts to expect slower sales growth this year, but it still expects revenues to increase more than 30%.
The nation's fastest-growing PC maker is expanding sales to individuals as well as to companies running sophisticated Web sites. All Dell computers are sold directly to customers, eliminating middlemen, and almost 30% are sold over the Web. Dell is expected to earn 90 cents per share this calendar year, for a P/E of 41. "It's the best-positioned PC manufacturer, given its direct business model and broad customer base," says analyst Phil Rueppel of Deutsche Banc Alex. Brown.
kiplinger.com
Kiplinger's Magazine
April 2000 | INVESTING | COVER | page 2
Big Tech Stocks
Just as fortunes were made outfitting prospectors during the California gold rush, some companies thrive today supplying the Internet's "picks and shovels." For instance, on its face Hewlett-Packard is another big, boring tech stock. But Selected American Shares fund co-manager Christopher Davis thinks that the company's printer business will flourish in the Internet age. Currently, he says, only 3% of all documents are printed from a computer. But that's changing fast. Says Davis: "The Internet means you distribute things electronically, then print them from your computer."
Analysts canvassed by First Call expect Hewlett-Packard to earn $3.55 per share this year, giving it a price-earnings ratio of 34. Roughly half the company's profit comes from printers. Says analyst Steven Milunovich of Merrill Lynch: "Hewlett-Packard's dominant market position and broad printer product line are fundamental to our long-term 'buy' rating on the shares." (Unless otherwise stated, all estimates of earnings and future growth rates in this story are courtesy of First Call.)
Lexmark International, spun off from IBM, is Hewlett-Packard's biggest printer rival and is involved in fewer other businesses. Analysts expect Lexmark to earn $2.85 per share this year, giving it a P/E ratio of 38. Web pages use more ink to print than other documents, observes Morgan Stanley Dean Witter analyst Thomas Kraemer. "The Internet drives demand for more printing," he says. "More printers using more ink on a page means there is a multiplicative effect on earnings." About 60% of Lexmark's revenues comes from products that need frequent replacements, such as ink cartridges.
No matter how you slice it, Dell Computer will continue to win big because of the Internet. The company suffered a bad fourth quarter last year because of a shortage of Intel chips and a falloff in business orders. Dell has warned analysts to expect slower sales growth this year, but it still expects revenues to increase more than 30%.
The nation's fastest-growing PC maker is expanding sales to individuals as well as to companies running sophisticated Web sites. All Dell computers are sold directly to customers, eliminating middlemen, and almost 30% are sold over the Web. Dell is expected to earn 90 cents per share this calendar year, for a P/E of 41. "It's the best-positioned PC manufacturer, given its direct business model and broad customer base," says analyst Phil Rueppel of Deutsche Banc Alex. Brown.
Sun Microsystems makes computers, too, but it also does a lot of other things: It sells about a third of all Unix servers and about half of Unix workstations. Its Java programming language is used heavily on the Internet because it allows applications to run on almost any computer. Even as Sun continues to gain market share, its gross profit margins remain a staggering 50%.
Analysts expect Sun to earn $1.03 a share this calendar year, meaning it sells at a rich 91 times earnings. But Goldman Sachs analyst Laura Conigliaro says, "Sun is in the enviable position of seeing gains from both dot-com and traditional companies."
While Sun sells the servers, Cisco Systems supplies the routers and switches that direct Internet traffic. Says Minyoung Sohn, an analyst with the Janus funds: "Ask any dot-com company who its vendors are, and the answer is pretty unanimous: They use Sun for servers and Cisco for routers."
Cisco is expected to earn $1.16 per share this calendar year, giving it a P/E of 113. Analysts expect Cisco's earnings to rise at a 30% annual clip over the next five years despite competition from companies such as Lucent and Nortel Networks. A.G. Edwards analyst Peter Andrew tells clients: "While competition is increasing, the total available market for networking products is also expected to increase almost tenfold. We believe that Cisco's dominance in the data-networking market will enable it to capture more than its fair share of the networking-product business."
A lot of Internet software, particularly database software, is made by Oracle, the world's second-largest software company after Microsoft. "Oracle dominates other companies because thousands of people can access one of its databases at the same time without it breaking down," says Dennis McKechnie, manager of Pimco Innovation fund. Oracle is also a player in the burgeoning business-to-business sector of the Internet. It set up a Web site to hook up General Motors with its suppliers.
Analysts expect Oracle to earn 63 cents this year, meaning it trades at a sky-high 95 times earnings. But analysts predict earnings will increase 25% annually over the next five years. Says Mark Verbeck, an analyst at U.S. Bancorp Piper Jaffray: "When you compare Oracle with its competitors -- most of whom have no earnings -- the stock is very reasonable."
To many, IBM is a stodgy symbol of old technology -- men in white shirts and suits selling mainframe computers. But IBM is a great picks-and-shovels stock, not least because many Web-site servers still use Big Blue's mainframes.
More important, IBM's Internet-consulting business is expected to grow more than 30% annually. A traditional business that decides it needs a new Web strategy will likely turn for help to a company it has experience with, such as IBM. Says James Berlino, an analyst with CIBC World Markets: "IBM has the most comprehensive offering of any information-technology company vying for business in the e-commerce world."
What's more, you get all this at a bargain-basement price (by Internet standards). Analysts expect IBM to earn $4.32 per share this year, meaning it sells at 27 times earnings.
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