Computer: Why PC Stocks Will Get Hot this Summer
Hi Larry! Here's a positive article for Dell! Leigh
biz.yahoo.com June 8, 9:00 am Eastern Time
Individual Investor
By: Craig Schneider (06/08/00)
Timing is everything. Investors are only a few weeks away from a series of events, some of which are seasonal, that will make personal computer makers some of the hottest buys on Wall Street. Can't wait for summer? Here's what you can expect.
First off, second quarter results will be released in a little more than a month, and by then, many investors will have likely shifted their attention to the catalysts coming in the second half of 2000: For example, consumer PC makers will make new product announcements for the back-to-school season, and there will be an increase in corporate system upgrades to Microsoft's (NASDAQ: MSFT - news) Windows 2000 operating system. The latest version of Windows is expected to accelerate sales for high performance desktops and servers.
Until then, the market is busy digesting news that consumer PC sales got off to a slow start in the second quarter. But that's what happens every year: It's a seasonal thing. Investors are prone to forgetting just how much seasonal fluctuation is built into the PC business.
Moreover, while corporate buying has picked up, some analysts were expecting a stronger showing coming out of the Y2K spending slowdown: It's a patience thing.
``Corporate buying is picking up after Y2K, but not as strong as some people had thought it would be,'' says David Bailey, an analyst with Gerard Klauer Mattison. ``However, we believe it will be driven late in the year by the deployment of Windows 2000 and the continuing of companies to automate operations to take advantage of the Internet. We think the second half demand will be quite good.''
What's more, some indications are starting to appear that the PC industry's prospects are brighter than people had assumed as recently as last month. On Tuesday, in a presentation at a New York conference sponsored by PaineWebber, Microsoft's chief financial officer John Conners said the software company sees PC sales growing 12% to 15% for its fiscal year beginning July, a brighter forecast than the guidance it gave in April.
As for the second quarter, numbers can still significantly change since PC makers typically have a back-ended quarter. ``A disproportionate amount of sales happen in the last month of the quarter,'' says Bailey. ``So it's a little early to make any calls whether they will make or miss their numbers.''
Still, the market research firm, International Data Corp. sees worldwide PC demand of 30.3 million units in the second quarter, which represents 15.2% unit growth year-over-year.
The bottom line is that investors who buy PC makers ahead of the coming catalysts with the annual back-to-school market and the ramp up toward the holiday season obviously have a stronger profit potential.
If there is any year to be ahead of the curve, it's this one. As Lehman Brothers' Analyst Dan Niles told individualinvestor.com, ``We believe that 2000 will be the best year for revenue and EPS growth for computer hardware since 1996.''
Niles recently joined Lehman Brothers after making a name for himself as one of Wall Street's top tech stock analysts at Robertson Stephens.
But what exactly will make the PC business so attractive this year? For starters, Niles believes the sub-$1,000 PC market that began in 1997 is peaking. Given the average PC hardware replacement cycle is three years, he reasons that consumers are starting to upgrade to higher priced machines capable of using rich media such as audio and full motion video on the Internet.
``Since semiconductor prices aren't collapsing, it's put a little bit of a floor under the PC prices,'' Niles adds. ``Now that prices look like they're holding, these guys can turn a decent profit.''
That's good news for Apple Computer (NASDAQ: AAPL - news), which is arguably more dependent than any other hardware maker on the back-to-school market given its dominance of the education market. On Tuesday, IDC said the maker of iMacs continues to be the largest PC supplier to the education market both in the U.S. and worldwide.
However, iMac sales have been softer than expected in the second quarter, causing concern among analysts and investors. In May, the market took a serious bite out of Apple Computer (NASDAQ: AAPL - news), causing shares to slide 32% to $84 by the end of the month. Shares have since traded back up, and they closed at $96.56 on Wednesday after gaining $3.69 in a day that saw healthy gains across the major markets.
Jimmy Johnson, an A.G. Edwards analyst, noted in a recent report that Apple's sales may be down sequentially from the first quarter. Customers may be waiting for the products that will be introduced next month at the annual MacWorld exhibition, and they also may be a little slower than normal in pulling their credit cards out of their wallets given the series of interest rate hikes from the Federal Reserve.
The consensus estimate calls for Apple to earn $0.88 per share on approximately $1.9 billion in revenue in the second quarter, but the company's revenue mix may differ from that in prior quarters. Sales of the iMac desktop are falling short of expectations, but high-end, high-margin G4 desktops and PowerBooks are selling well and should offset the iMac shortfall. Meanwhile, iBook sales are in line with expectations.
Niles is waiting on the sidelines with a ``neutral'' rating, but once the Street updates its expectations on the company's future sales, he plans to get more bullish.
Gateway (NYSE: GTW - news) is expected to be another beneficiary of a turn for the better in the consumer PC market as the back-to-school and holiday seasons approach, and Niles, for one, is optimistic about the company's prospects during the second half of the year. Gateway also had a solid day on Wednesday, gaining $1.69 to $54.50.
Gateway has a partnership with America Online (NYSE: AOL - news) to make a slimmed down Internet appliance product that is due out in the fourth quarter and should also add to the top line during the holiday season.
The lesson to be drawn from the good second half prospects for Apple and Gateway is that investors shouldn't be put off by the weak consumer sales during the second quarter.
``We had the exact same thing last year,'' says Bailey of Gerard Klauer Mattison. ``You don't want to extrapolate that out for the rest of the year.''
Also, the conventional wisdom on Wall Street says the current sequence of interest rate hikes are coming to an end. If the conventional wisdom is right, and the Fed back offs as the summer wears on, that will also bode well for the PC sector.
Two of Niles' favorites in the sector are well known names, Dell Computer (NASDAQ: DELL - news) and Compaq Computer (NYSE: CPQ - news). Dell, which was one of individualinvestor.com's Magic 25 picks in 1999, rose $0.56 on Wednesday to $45.25. Compaq, however, lost some altitude falling $0.81 to $27.06.
``You want to pick your spots,'' says Niles. ``Stick with guys that are direct and the ones that are heavily corporate focused.'' As a result of Dell's built-to-order strategy, it tends to gain market share during technology transitions, and will certainly benefit from the transition to Windows 2000. Another catalyst for Dell will come from Intel Corp.'s (NASDAQ: INTC - news) launch of its Itanium microprocessor in the second half.
Niles expects Dell to earn $0.21 per share in the second quarter, in-line with the consensus estimate and 11% above year-ago levels.
Compaq, as the largest supplier of computing systems worldwide, has stumbled some in execution trying to emulate Dell's direct sales model. Still, Niles is confident that it can start to achieve a premium multiple thanks to consistent results and the value in its enterprise computing business.
``We don't think there's much downside,'' says Niles, ``and if it works, it could be a huge home run.'' He expects the company to ship 2500 units of its Wildfire servers and receive at least $1 billion in revenue from that business in 2000. Niles forecasts Compaq will make $0.21 per share in the second quarter, which is in-line with the consensus estimate and 311% above year ago levels.
Moreover, while things are looking up for the PC hardware pure plays, there's also renewed bullishness for the large, diversified technology firms with significant stakes in PC hardware, namely Hewlett-Packard (NYSE: HWP - news) and IBM Corp. (NYSE: IBM - news) .
Hewlett-Packard has climbed more than 20% in the last five days. Wednesday, the stock gained a solid $4.56 to $122.56. What got this computer maker jumping? Aside from the overall tech rebound, positive comments from management. In an upbeat analyst meeting last week, chief executive Carly Fiorina reiterated a promise to deliver 15% sales growth this year.
The company's other goals include an expansion of its storage business and more growth in Unix servers. Fiorina also unveiled an agreement with Amazon.com (NASDAQ: AMZN - news) to supply the Internet retailer with 90% of its computers during the next 18 months. The company is expected to earn $0.85 per share for its fiscal third quarter ending in July, 28% above year-ago levels.
Meanwhile IBM is expected to earn $1.01 per share for the second quarter, up 10% from year-ago levels. Big Blue, too, had perhaps the nicest jump on Wednesday among the box makers, gaining $8.63 to $121, although the stock is still well short of its 52-week high of $139.19.
Bottom Line:
Investors are best advised to look beyond the second quarter for investment opportunity in the PC sector and be ahead of the curve. Many of the issues that weighed down the sector's stocks are no more than seasonal, and the catalysts coming in the second half should be more than enough to offset them.
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