After Weathering 4Q, Tech Cos. Hopes Europe Sustains Growth
Dow Jones Newswires -- January 30, 1998
By Christopher Grimes
NEW YORK (Dow Jones)--For all the fear about the Asian flu's impact on technology stocks, the group's fourth-quarter results have been, well, so-so.
But after a season of voracious selling in the tech market, so-so isn't so bad.
Even for some high-tech companies that fell short of Wall Street expectations, investors seemed to take heart that things weren't as lousy as they could have been. For instance, Motorola Inc. (MOT) missed Wall Street forecasts by 3 cents, but its stock rose 3 points after the announcement. The rationale? Considering its 30% exposure to Asia, Motorola weathered the storm well.
"It's not been as bad as the market would have had you believe a couple of months ago," said Bruce Lupatkin, director of research at Hambrecht & Quist Inc. "(But) you wouldn't have expected to have captured all of Asia's problems in the December quarter alone."
Still, the outlook for the March quarter - typically a slow time for technology anyway - has been "questionable to weak," said Hank Herman, chief investment officer at Waddell & Reed.
"I would say that most companies were saying that the first quarter won't be all that encouraging, but by the second half things would get back on track," Herman said.
Several big high-tech companies' results met or beat forecasts, only to have their earnings expectations whacked the next day because of comments they made about the March quarter. International Business Machines Corp. (IBM), Intel Corp. (INTC) and Digital Equipment Corp. (DEC) all had their estimates cut because of a weak outlook.
At the same time, analysts and portfolio managers were encouraged by robust European sales in the fourth quarter. Intel, Microsoft Corp. (MSFT), Compaq Computer Corp. (CPQ) and Siebel Systems Inc. (SEBL) reported strong sales in the region, offsetting weakness in parts of Asia to some degree.
Some optimists on Wall Street see this as a clear sign that Europe is making a long-awaited comeback, just in time to neutralize the Asian crisis.
"Europe is trying to catch up with the rest of the world," after a couple years of underinvesting in technology, said Andrew Neff, an analyst at Bear Stearns & Co.
Others argue that the strength in Europe has been simply a seasonal upswing that won't last.
European rebound or no, the focus has been primarily on Asia. While some companies, such as Compaq, emphasized their limited exposure to the region, most expressed caution trimmed with blurry optimism.
Probably no one conveyed this more poetically than Lawrence Ricciardi, IBM's acting finance chief.
"I don't want to hang black crepe" about Asia, Ricciardi said, adding that he thought the worst of the financial crisis in the region was over.
Nonetheless, Ricciardi said he didn't see any relief from troubled Asian countries during the first half of 1998.
Microsoft abstained from funereal analogies, choosing a meteorological theme instead. In its earnings report, the company said that economic weakness in Southeast Asia and the Far East "clouds the outlook" for 1998.
For some semiconductor companies, those clouds ultimately may have a silver lining.
The semiconductor industry overall is burdened with a case of oversupply, manifested by the plunging prices of DRAMs, or dynamic random access memory chips. The DRAM glut has largely been responsible for keeping the semiconductor industry from growing at its historically high rates.
But Japanese and South Korean semiconductor makers appear to be downsizing, which led Texas Instruments Inc. (TXN) to project during its earnings report that the supply problem could balance out. The company admitted, however, that it was "impossible" to tell how soon this could happen.
A positive message, although the "impossible" part is hardly emboldening.
But a more solid has picture emerged on how much the PC industry is expected to grow in 1998.
In a discussion with analysts after its earnings report, Intel officials said they were "comfortable" with a recent projection that the industry would expand 17% in 1998. Compaq officials gave a ballpark estimate of 15% worldwide growth for the industry, although they added that their own company's growth would more than double that
rate.
Those estimates for overall growth are still slower than the 20.9% rate for the PC industry in 1997, however.
Waddell & Reed's Herman said the fourth quarter treated software companies such as BMC Software Inc. (BMCS) and service-oriented computer companies like Electronic Data Systems Corp. (EDS) more kindly than hardware manufacturers.
And the networking companies tended to present a more solid outlook than other sectors, despite worried about Asia. Particularly strong were companies leading efforts to increase bandwidth, said Cowen & Co.'s Chris Stix. He mentioned Bay Networks Inc. (BAY), Cisco Systems Inc. (CSCO) and Ascend Communications Inc. (ASND) as companies poised to fare better in 1998.
Portfolio managers and analysts agreed that whatever happens in the March quarter, many technology stocks have disappointment figured into their stock prices. And some technology bulls say that the group is due for a broader rebound.
James Townsend, chairman and portfolio strategist at SoundView Financial Group, has been waiting for the group to scrape bottom for a few months. And he thinks that finally happened Jan. 9, when the Nasdaq Composite Index fell by the second-most points ever.
"Looking to the March quarter, hopefully the expectations are (built into the stock prices) and, with any upside from the European theater, we could have a better-than-expected quarter," Townsend said. "That remains to be seen, but at this point I'm recommending that investors be overweighted in technology."
-Christopher Grimes; 201-938-5253 |
