Investors Find Little Holiday Cheer in PC Sector
Thursday November 30 5:43 PM ET
By Nicole Volpe
NEW YORK (Reuters) - Technology investors may already feel like they were run over by eight reindeer, but analysts say they expect more bad news to trample the personal computer sector through the holidays and into the New Year. Gateway Inc. (NYSE:GTW - news), the No. 4 PC maker in the U.S. market, warned late on Wednesday it would show a fourth quarter loss, as sales of PCs over the pivotal Thanksgiving weekend were 30 percent lower than last year.
Shares fell 36 percent on Thursday to a low unseen in almost three years -- and pulled down other computer makers and chipmakers with it. Gateway closed down $10.50 to $19, making it the top percentage loser on the New York Stock Exchange.
Investors, already battered by a string of warnings from computer makers this fall, wondered if it could really get any worse. But analysts said there could be more trouble brewing if slack holiday sales touch off a price war.
``Clearly we believe that more bad news lies ahead for the PC sector,'' said Bear Stearns analyst Andrew Neff. ``We see the potential for increasingly competitive conditions in the PC industry and the strong likelihood of a price war.''
Neff said such a price war has essentially already begun, threatening the earnings of No. 1 personal computer maker Compaq Computer Corp. (NYSE:CPQ - news) and Apple Computer Inc. (NasdaqNM:AAPL - news).
``In light of the aggressive pricing environment that currently exists, we believe that earnings for Compaq, H-P and Apple -- all of which have high exposure to consumer PC sales -- could be placed at further risk,'' he said.
Neff said he was concerned about Hewlett-Packard Co. (NYSE:HWP - news), even though the No. 3 computer maker on Thursday reaffirmed its sales and earnings expectations for the year ahead. ``They were cautious about PC growth if you read into their comments,'' he said.
Even International Business Machines Corp. (NYSE:IBM - news), which still generates 20 percent of its sales from PCs, was exposed to danger, Neff said.
Gateway's warning unnerved investors who may have felt reassured by a statement from Chief Financial Officer John Todd, issued only nine days before the warning, in which he said PC sales were coming in as expected.
``Gateway told us a week ago everything is fine,'' said Tim Ghriskey, portfolio manager of Dreyfus Fund. ``All the PC makers have had a lot of problems, and at this point I think a chance of positive surprises are very low.''
He added that Gateway's warning of slower sales could itself become a self-fulfilling
prophesy.
``Consumers are watching the evening news and they are watching the Nasdaq going down, and whether they are invested or not, the news weighs on people and causes spending habits to be cut back,'' he said.
The Philadelphia computer maker index (^BMX2 - news) fell nearly 9 percent, or 12.24 to 125.71, well off its year-high of 244 set on Sept. 1.
While the stock prices of Dell, Compaq, Apple, and Hewlett-Packard all set new year-lows, Neff said by his analysis that did not mean they were all cheap.
Neff said Gateway, at $19 on Thursday, was trading near historical lows when he compares the stock price to last year's sales. He uses that price-to-sales comparison as an indicator in tumultuous times, adding that sales were more stable than profits, which can quickly turn into losses.
``Gateway, on a price-to-sales ratio since it went public, has generally sold between 50 and 200 percent of sales,'' he said. ``Fifty percent of sales is somewhere around $13 and $15 (a share) to give you an idea of where it gets cheap.''
Analysts were also looking carefully at makers of chips that are built into PCs, trying to determine when the worst might be over.
``I'd say we're reaching a bottom here, and we have to find the point where it is the end of the world and then find the bargains -- but it's tough to make that decision today,'' said Prudential analyst Hans Mosesmann.
Intel Corp. (NasdaqNM:INTC - news), which makes the chips that are the brains in about 80 percent of all personal computers, and Micron Technology Inc. (NYSE:MU - news), which makes the memory chips used in PCs, were both hit by Gateway's news.
Intel closed down 11 percent, or $4-11/16 at $38-1/16, near its year-low of $35.
``We've been skeptical about this whole season, and once it starts off badly it could be hard to catch up,'' he added. ``You could end up with a glut of PCs and a glut of processors. Basically, you've got to stay away from the PC plays.''
``Intel is trading in the low end of its range'' based on its price-to-earnings ratio, which has been between 25-30, Mosesmann said. ``Between 25 and 30 Intel historically gets interesting.''
Micron on Thursday fell 8 percent, or 2-13/16 to 31-1/2 in New York Stock Exchange trade, well off a year high of 97-1/2, but within a recent trading range of between 30 and 40.
Mosesmann said that for Micron to break out of that range, memory chip pricing would need to stabilize. ``For Micron to move out of this trading range, pricing needs to stabilize in the spot market for several weeks,'' he said. |
