Tuesday May 15, 5:40 pm Eastern Time
SmartMoney.com - Stock Watch
Next at Bat...Dell Computer
By Monica Rivituso
THESE DAYS, keeping tabs on the PC industry is a lot like following the lowly New York Mets. Fleeting moments of good news (Mike Piazza smacks a three-run homer! Intel (NASDAQ:INTC - news) calls the bottom of the PC market!) don't do much to change the overarching feeling that things just aren't right.
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As if investors haven't fretted enough this year about all things PC-related, they'll get something else to mull over when Dell Computer (NASDAQ:DELL - news) reports first-quarter results Thursday after the close. (Hewlett-Packard (NYSE:HWP - news) releases results on Wednesday, but Dell, the world's largest PC maker, will garner most of the attention.)
PC fans itching for signs of a turnaround probably won't feel compelled to break out the giant foam ``No. 1'' hands just yet. Then again, they probably won't be dealt a vicious curveball, either. Just last week, Dell reaffirmed that it would hit its first-quarter guidance of $8 billion in revenues and earnings of 17 cents a share, and that operating profit margins would be slightly higher than the company anticipated. But management also said it's still cautious about the outlook for the rest of the year.
Indeed, the current environment is a trying one, and slowing industry growth is prompting Dell to tighten its belt another notch. Over the next two quarters, the PC maker will eliminate 3,000 to 4,000 jobs, and will require most salaried employees in the U.S. to take unpaid time off. Even the industry's leader has to streamline operations when PC sales slow.
Adding to the uncertainty, Dell probably won't give much indication that the PC landscape is about to improve. Dan Niles, a Wall Street Journal All-Star analyst from Lehman Brothers who has been bearish on PCs since last year, says he's not expecting to walk away from Dell's report with any more of an optimistic take on the industry.
Why the skepticism? For starters, there's the small matter of the all-out price war that's being waged. Earlier this year, Dell started cutting prices aggressively to boost market share — and, so far, it's been rather successful. Not only did it oust Compaq Computer (NYSE:CPQ - news) from the No. 1 spot recently, but it continues to grow faster than the industry average. In the first quarter, world-wide PC shipments increased 3.5%, while Compaq's rose a mere 0.3% according to Gartner Dataquest. Dell's, by contrast, ballooned 34.3%. But because of price cuts, revenues are expected to have grown by only 9.6% from a year ago, far slower than unit sales. And Compaq isn't likely to sit back and take its market-share erosion much longer, which leads Niles to believe the industry's turmoil will continue. ``Our view on Dell is this is going to be long and it's going to be bloody,'' he says of the price war.
And while the price war may be a good long-term strategy to gain market share, it's hurting profits in the short term, Niles says. Dell's first-quarter earnings guidance of 17 cents a share is actually two cents shy of what it earned a year ago. What's more, consensus second-quarter, third-quarter and full-year earnings estimates (as they stand now, anyway) also fall short of year-ago levels. And when you factor in the delay of Microsoft's new operating system, Windows XP, the industry won't likely see an upturn until next year, Niles says.
But by next year, things could be brighter indeed. Merrill Lynch analyst Steven Fortuna is quite bullish about 2002. On Tuesday, he lowered his 2001 unit growth forecast to 3% from 7%, but upped 2002's to 17.5% from 15.5%. The big drivers to sales next year, according to Fortuna: Windows upgrades, a ``Y2K refresh cycle'' (meaning that computers purchased ahead of Y2K will need replacing), and the reacceleration of the small business, European and consumer markets.
Of course, that's next year. PC makers still have to get through 2001, which is why investors will be hanging on management's every word during Dell's Thursday conference call. In a year when platitudes about lack of visibility have become the norm, it sure would be nice if Dell threw a change-up. |
