From WSJ Interactive - Chu and Compaq are mentioned..
Regards,
John
2000
PC Sector Gets Smacked — Again
By Monica Rivituso
ANOTHER DAY, another troubling bit of news for the PC sector.
Wednesday's worry point was SCI Systems (SCI), a contract manufacturer that makes products for the computer, telecommunications, medical and industrial markets. Before the open, SCI warned that fiscal first-quarter revenue would come in $300 million lighter than expectations at $2 billion. Earnings, it said, would fall four cents short of estimates at 34 cents. The culprit? Seasonal weakness in demand for consumer electronics and finished PCs.
The preannouncement delivered a 29% pounding to SCI's stock before the shares recovered — albeit slightly — to end the day 20% lower at $44.69. And the shock waves traveled across the contract-manufacturing and PC sectors. Solectron (SLR), Celestica (CLS) and Jabil Circuit (JBL) tumbled 1%, 3.8% and 4.2%, respectively. Compaq (CPQ) and Hewlett-Packard (HWP), which accounted for 10% of SCI's annual sales (according to SCI's 1999 annual report), also got smacked, falling 5.5% and 5.4%, respectively.
Thing is, SCI's warning may not be so dire on second look. For one thing, the announcement was only partly due to seasonally soft PC demand. Weakness in other products like set-top boxes also played a role, as did component shortages. What's more, PC softness was only seen in sales of completed PC boxes, or what the company refers to as "finished" PCs. SCI was careful to distinguish between the finished PCs and the printed circuit-board assemblies it makes. In fact, management said on a conference call that it was "reasonably encouraged" by its board business.
That's an important difference, especially since analysts say Compaq's exposure to SCI is largely with its board business. It makes boxes, though, for Hewlett-Packard, according to SG Cowen's H-P analyst Richard Chu. SCI's announcement, agrees Banc of America's Compaq analyst Kurtis King, is centered on H-P. "Clearly and unambiguously, the problem is H-P's consumer Pavilion PC line," he says, adding that SCI's announcement calls into question how much market share H-P has captured.
Chu admits that H-P might be seeing a "little more of a fight" from Compaq's refreshed Presario line of PCs. But he warns it's dangerous to read too much into SCI's announcement. Since H-P's fiscal fourth quarter doesn't end until October, Chu notes it's still too early to tell if this will have any implications on the company's consumer PC business. "We haven't changed any numbers on H-P," he says, noting Wednesday's stock drop is an overreaction.
King, who issued positive comments Wednesday morning on how Compaq's third quarter is tracking, still considers the Houston-based company as the best PC name to own right now. With all the concern about consumer PC sales, King notes that while this segment represents about 16% of Compaq's revenues, it only accounts for roughly 5% of earnings. What's more, he says SCI's announcement Wednesday doesn't tell him anything "significantly different" about PC demand for the current quarter or second half of the year.
"I think demand in general is OK," he says. "The best name to be buying right now is Compaq. Servers are what will drive Compaq's numbers. There has been no negative data whatsoever regarding server demand."
But like most things having to do with PCs and semiconductors in the past month or so, not everyone is on the same page. While Banc of America's PC analyst concluded that SCI's announcement has little impact on Compaq, their semiconductor analyst, Richard Whittington, cut his ratings on chip titans Intel (INTC) and Advanced Micro Devices (AMD) based in part on SCI's warning.
Whittington issued a note early Wednesday morning that tore into Intel's production problems, noting that the superior manufacturing performance of competitor Advanced Micro has gone largely unrecognized. After the SCI warning, though, Whittington cut his ratings, earnings and revenue estimates on both chip makers. In a note to clients, he said Intel's production wrinkles combined with the "SCI demand indications" led him to "have significant concerns on both the demand and the supply side." As for Advanced Micro, Whittington wrote SCI's shortfall appears to be centered in low-end consumer PCs, putting pressure on his previous estimates.
Arriving at a consensus on anything PC or chip related is a little like trying to staple jello to a wall. Consider the recent string of announcements: Last week, questions about PC demand grew thick after two analysts slashed their ratings and earnings estimates on Intel and memory-chip maker Micron Technology (MU). Last month, investors got spooked that the semiconductor upturn was screeching to a halt after chip-equipment maker Kulicke & Soffa (KLIC) announced some customers were delaying orders. Tuesday, fellow chip-equipment company PRI Automation (PRIA) delivered a disappointment of its own when it told Wall Street to dial down fiscal fourth-quarter expectations.
PRI's warning is perhaps the easiest to pick apart and seemed to be company-specific. After all, Chief Executive Mitch Tyson bluntly told analysts on a conference call that "we screwed up." But the other announcements all contain shades of gray. Sprinkle in plenty of enthusiastic comments about enduring PC demand or the continued upturn in the chip industry (see story), and the whole picture starts to resemble a Jackson Pollack painting.
Despite its September-quarter problems, SCI management stood by its previous guidance to analysts that it would post $10.5 billion in sales and $1.70 to $1.74 in earnings for the year. Fiscal second-quarter sales, the company said, should come in at $2.5 billion on earnings of 42 cents a share, a penny below the First Call/Thomson Financial consensus estimate. Wednesday's announcement didn't seem to be a conclusive negative for the overall PC industry. As we've said before, it's best to consider the incremental information that emerges and evaluate how much it weighs on the larger picture. Of course, taking some Dramamine may not be such a bad idea either. |
