i found this on msft investor site...sun a buy..
Lunch with Sun
On Friday, Sun hosted its regular mid-quarter analyst lunch in San Francisco. Management noted
third- quarter trends have continued into the fourth quarter. While growth in the United States and
Europe remains strong, the weakness in Asia Pacific persists. Gross margin, which expanded to
53.3% during the third
Dell margins are 23%(approx).
quarter, appears stable. Sun is experiencing strength across its product lines
and there has been no dramatic shift in the product mix. The new Darwin desktops are doing really
well. Server demand from the entry-level E450 to the high-end Starfire E10000 remains robust
aided by the recent upgrade of Sun's midrange server series. Component constraints remain
nonexistent. My fiscal fourth-quarter estimate is 70 cents per share.
During the first fiscal quarter, Sun plans to bring on line a new manufacturing and order-management
system. To minimize the disruption the installation of the new system may create, Sun is attempting to
build backlog during the fourth quarter for the first quarter. The recent reorganization of Sun's
operating units and the installation of the new system are expected to produce significant operating
expense reduction during fiscal 1999. I remain very comfortable with my fiscal 1999 estimate of $2.70
per share. Sun Microsystems continues to be my favorite idea and my investment rating remains
"buy."
Microsoft can't bring back Lotus 1-2-3 or WordPerfect even if they win.
But Sun Microsystems, at least, can still shine on its own merits. Analyst Report
By Bret Rekas
The attorneys were amassing billable hours again last week while Wall Street wasted brain cycles
contemplating the potential impact of the legal maneuvering. Sun Microsystems (SUNW) filed two
additional motions in its Java contract and copyright suit against Microsoft (MSFT). Sun requested
that a court compel Microsoft, which is attempting to modify Java to suit Windows, to ship a 100%
pure implementation of Java with Windows 98.
In March the court issued a preliminary injunction barring Microsoft from using the "Java compatible"
logo on its products, but did not prevent Microsoft from shipping a modified implementation of Java.
The second motion asks that Microsoft stop shipping Java development tools that do not produce
100% pure Java code.
Although Sun is attempting to prevent Microsoft from undermining Java's "write once, run anywhere"
premise, the courtroom drama will be anticlimactic. Windows 98, along with Microsoft's modified Java
implementation, will ship long before the court even entertains these latest motions. I continue to
believe Java's ultimate fate will be determined by developers, not judges. (Investor is published by
Microsoft).
Phew?we're still here
Despite Microsoft's decision to delay the release of Windows 98 in a last-minute attempt to avoid a
protracted dispute with the Department of Justice, the market and the U.S. economy didn't collapse.
Over the weekend, however, negotiations did collapse and the "big bug fix" shipped to personal
computer OEMs about the same time Joel Klein and a number of state attorneys general unleashed a
barrage of anti-trust suits against Microsoft on Monday.
Microsoft is now confronted by a foe with unlimited time and resources that threatens an incessant
investigation and hopes to write a revisionist history of the PC business. Whether you believe the
DOJ's anticipated action is misguided or justified, it is unlikely to dramatically alter the competitive
reality. Lotus 1-2-3 will never again be the dominant spreadsheet, Word Perfect won't suddenly
displace Word, and the Mac won't magically regain market share.
H-P hiccups
On Wednesday afternoon, Hewlett-Packard (HWP), for the fourth consecutive quarter, disclosed
earnings would fall short of expectations. On Friday it released complete results for the second fiscal
quarter. H-P reported earnings of 65 cents per share versus 75 cents per share a year ago.
Excluding some one-time charges associated with the consolidation of H-P's InkJet operations and
the Heartstream acquisition, earnings from operations were approximately a nickel below the
78-cents-per-share Street consensus. Although the stock had soared 27% to $81 5/8 per share in
the past three weeks, the disappointing results should have come as no surprise, in my opinion. As
anticipated last week in BitStream, the predatory PC pricing environment and the Asian economic
malaise adversely affected revenue growth and gross margins.
Revenue rose 16% to $12 billion and orders improved 12% to $11.6 billion. While revenue growth
was in line with my forecast, gross margin plunged 240 basis points to 32.4% and H-P failed to
manage operating expenses. Although H-P was the fastest growing PC company in the world for
the third consecutive quarter, as unit shipments rose nearly 70%, H-P's PC business was not
profitable.
The anemic Asian economies contributed to H-P's disappointing Test & Measurement results.
Although the T&M operations generate only 10% of revenue, gross margins are significantly higher
than the corporate average. T&M revenue rose a modest 5% as demand for semiconductor test
equipment evaporated. Particularly discouraging was H-P's failure to contain operating expenses
during the quarter. Despite H-P's efforts to reduce costs, operating expense growth accelerated.
Operating expenses increased 17% to $2.9 billion or 24.3% of sales.
I have reduced my fiscal 1998 estimate from $3.30 per share to $3.10 from operations. This estimate
assumes revenue rises 15.5% to $49.6 billion, gross margins contracts to 32.6% and operating
expenses decline modestly to 23.5% of sales. My third-quarter estimate is 65 cents a share versus 58
cents per share. While I consider H-P a core technology holding, with its dominant printer franchise
and leadership positions in both the UNIX and WIntel systems markets, I see no catalyst to propel the
stock meaningfully higher in the next three to six months. I do not believe H-P will be able to realize
sufficient short-term operating expense reduction to compensate for continued gross margin erosion
as the product mix continues to shift to higher-volume, lower-margin products. My rating remains
"long-term attractive."
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Gerstner's glow
IBM (IBM) rose 4% last week after Lou Gerstner charmed Wall Street analysts during his fifth annual
meeting. IBM's CEO focused almost exclusively on the opportunity for top-line growth; however, no
new insights were revealed. The growth engine at IBM obviously remains the services business, which
now produces 25% of total revenue. Although I agree that IBM's service business will continue to
produce 20%-plus revenue growth, as Gerstner contended, service gross margins, even with
continued improvement, remain far below the corporate average.
Although IBM continues to reduce costs associated with declining operations and invest in growing
but lower-margin businesses like services, I believe double-digit revenue and earnings growth will
remain elusive. Of course, while I refrained from upgrading H-P, I have also advocated on occasion
selling IBM and buying H-P. My investment rating remains "Market Perform."
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