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Technology Stocks : Hewlett-Packard (HPQ) -- Ignore unavailable to you. Want to Upgrade?

To: Dave B who wrote (442)	5/16/2002 4:11:34 PM
From: Elwood P. Dowd	Respond to of 4345

2002: The Worst Year For IT Services Lisa DiCarlo, 05.16.02, 3:30 PM ET NEW YORK - Information technology services, one of the relative safe havens of tech investing over the past two years, will experience an unprecedented low growth rate in 2002. According to market researcher Gartner, "all segments of the IT services market will be impacted" by worldwide revenue growth of only 2.8%, or $557 billion. Analyst Kathryn Hale says services growth has been declining for two years, down from 4.1% last year and 7% in 2000. That's the bad news. The good news is that 2002 should be the bottom, as Hale predicts an uptick next year. Certain segments are faring better than others. In particular, Electronic Data Systems (nyse: EDS - news - people ) has done well because about two-thirds of its business comes from outsourcing, which tends to boom during rough times since it helps customers cut costs. EDS' first-quarter earnings were down about 25% to 72 cents per share, but quarterly sales grew to $5.3 billion from $5 billion in the year-ago quarter. At $54, shares of EDS are trading at only 16 times 2002 earnings and 14 times 2003 earnings. Gartner says that three of the biggest growth areas over the next three years will be IT outsourcing, administrative outsourcing, and development and integration. Integration, or making disparate applications and Web sites talk to each other, is very complicated work that no one has even come close to mastering. IBM (nyse: IBM - news - people ) is probably the closest thing there is to an expert in the area of integration and should stand to benefit in the long term. IBM's Global Services division is the company's largest--accounting for about 40% of revenue--and it's growing, but rumors swirl that the group will soon be hit with layoffs as a cost-cutting measure. Administrative outsourcing, which is third-party maintenance of human resources, accounting, payroll and other functions, should hit $129 billion in worldwide revenue by 2005. Hale says she wouldn't be surprised to see traditional IT services companies, such as IBM, jumping into the fray. Hardware maintenance and support will not grow as fast as other sectors, with worldwide revenue reaching an estimated $97 billion to $105 billion by 2005, while IT services as a whole should hit $696 billion, says Hale. One of the reasons why the services industry has continued to grow while sales of technology products have shrunk is that firms are now implementing the technology they bought when they had money to spare. "The use-what-you-have approach is sustaining near-term growth," says Hale. Indeed, the industry is consolidating because of a need for services solutions. That's partly why Hewlett-Packard (nyse: HPQ - news - people ) bought Compaq Computer. The good news is that there doesn't seem to be any end to the need for them. --------------------------------------------------------------------------------