Tech stocks wait their turn
As the Dow heads toward 9,000, tech
companies hold on for good news
March 26, 1998: 2:05 p.m. ET
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NEW YORK (CNNfn) - Technology stocks have
certainly been a major factor in the Dow's spectacular
rise, but when the party celebrating the Dow at 9,000
takes place, technology stocks will be the wallflowers.
In fact, barring some kind of radical change,
analysts say technology stocks won't get their turn to
dance until the second half of the year.
Technology giants such as Compaq Computer Corp.,
(CPQ) Intel Corp. (INTC) and Motorola Inc. (MOT)
issued earnings warnings earlier in the month,
reflecting inventory backlogs and the Asian financial
crisis.
The warnings sent stock markets sharply lower. But
unlike previous periods when technology warnings
struck fear in the hearts of investors, the drop was
shortlived as investors clung to the view that, over the
long term, technology stocks still have room to run.
Roger Kay, senior research analyst at International
Data Corp., said because the distribution channels are
still backed up, revenues will be even lower than
expected for the next couple of months.
"With the channel stuffed, the buying flow is
smooth," Kay said. "Sales will be strong, but that
revenue stream goes to the channel distributors, not the
manufacturers."
"We don't expect any major surprises," said T.
Peter Andrew, a technology analyst at A.G. Edwards.
"We're hitting a seasonal slowdown. A lot of PC
manufacturers are going through inventory
adjustments, and we're seeing a snowball effect."
The estimates out of First Call support these
assessments. According to Chuck Hill, First Call's
director of research, the forecast for technology stocks
dropped sharply in the last two months.
"We forecast technology as a whole for 11 percent
growth as of Jan. 2. As of March 20, it's at minus 7
percent," Hill said.
Hill said computer and semiconductor stocks will
take the worst hit. First Call lowered its outlook for
computer manufacturers from 18 percent growth to
minus 12 percent. Semiconductors slipped from minus
4 percent growth to minus 30 percent.
"We expect the numbers to be somewhere lower by
the week of April 13, when all the (quarterly earnings)
announcements will have been made," Hill said.
First Call downgraded its estimates for Compaq,
IBM and Intel for the current quarter. It's also
predicting significantly lower year-over-year earnings
for Compaq and Intel for the quarter ending in June.
Not all the news is bad, however. Some of
technology's heavy hitters are posting surprisingly good
results.
First Call upgraded its estimates for both Apple
Computer Inc. (AAPL) and Dell Computer Corp.
(DELL) for the current quarter. It also expects
year-over-year earnings for both companies to increase
in the next quarter.
Kay added the software industry appears to be
particularly strong.
"Our software forecast went up from 17 percent
year-over-year growth to 20 percent, mainly due to
Microsoft," Kay said.
On Tuesday Microsoft Corp. (MSFT) surprised
investors by forecasting fiscal third quarter profits of
about 48 cents a share, 4 cents above Wall Street's
estimates.
Kevin McCarthy, a technology analyst at Donaldson
Lufkin & Jenrette, said software companies stand the
most to gain from the price cuts doled out recently by
computer makers.
"They're (computer manufacturers) taking price
cuts to sell more units," McCarthy said. "That hurts
hardware companies' revenues. Since Microsoft charges
the same for their products regardless of what PC
makers do, that price elasticity helps them."
Looking ahead to the quarter ending in June,
McCarthy said the inventory backlogs and cutbacks
across the supply chain will continue for computer
makers. But he said the trend shouldn't last beyond the
next quarter.
"Compaq is one of the companies that will be
intentionally taking big lumps in the next two quarters
to get to a better inventory model," McCarthy said.
"Once they get their inventory in order, they should be
strong in the second half of the year."
Indeed, Compaq said it will shut down two lines in
one of its manufacturing facilities in Houston for two
weeks in April to balance its production.
Things may not be so rosy now, but it looks like
tech stocks will enjoy an upswing in the second half of
1998.
"The demand trends are still strong for technology,"
he said. "There's concern for Asia and especially Japan.
But there's in increasing appetite for technology
products in different industries and in many parts of the
world."
-- by staff writer John Frederick Moore |
