Another article from thestreet.com:
The Ax: Ashok Kumar, Calling It as He Sees It
By Eric Moskowitz
Staff Reporter
9/17/98 11:26 AM ET
This past June, PC analysts were anticipating another strong performance
from Gateway (GTW:NYSE). After all, the North Sioux City, S.D., PC
maker had just beaten estimates by 14 cents and 8 cents, respectively,
over its past two quarters, and the company was alerting analysts that it
was seeing a "record response" from its new YourWare program.
Piper Jaffray analyst Ashok Kumar wasn't buying it. His earnings estimate
of 40 cents a share was the lowest on the Street, a full 4 cents below the
consensus. The analyst says Gateway's top management secretly pressured
him to change his numbers, even claiming he was going to be proven
wrong.
"The company called me and told me to stop" publicizing the bearish
views, says Kumar.
"We don't think that's the way it happened at all," a Gateway spokesman
said. "We never tried to tell Kumar to change his opinion on the stock."
Nonetheless, Kumar warned in a report before the company's July 24
second-quarter earnings report that even his Street-low estimate was too
high. "Our recent checks indicate that units in the June quarter could be
down 5% sequentially," he wrote. "If this scenario holds out, earnings will
come in 2 cents below our reduced estimates."
As it turns out, Gateway reported earnings of 38 cents a share, catching
many of the company's bullish analysts off-guard. The stock promptly fell
10%.
Kumar's unbiased and unrelenting reports are beginning to stand out from
the rest of the pack -- and that's not easy to do when you're writing out of
Minneapolis. His writings are often more revealing than Wall Street-centric
reports from analysts on such key tech companies as Gateway, Intel
(INTC:Nasdaq) and Compaq (CPQ:NYSE). While many others tone down
their reports for fear of offending a company's top brass, Kumar doesn't
think twice about not filtering his opinions.
"For me, the investment banking end of this business is secondary," says
Kumar, a senior analyst and managing director at Piper Jaffray since
March. "My style is to look for an incremental piece of evidence that's
different than the norm."
Before this stint, the 34-year-old analyst not only
worked at Prudential and Southcoast Capital but
served as an engineer and marketer at Intel.
Kumar's practical semiconductor experience along
with his financial education -- he has a CFA from
Wharton -- makes him a contender for the ax
throne on both the semiconductor and hardware
fronts.
Kumar, much like ax Dan Niles at BancBoston
Robertson Stephens, covers the PC industry,
which helped him earlier this year to deduce that if
semiconductor chip prices were falling faster than
PC prices, then PC margins would hold up
relatively well. (Kumar has a buy rating on Gateway and Compaq, and a
strong buy on Intel and Dell (DELL:Nasdaq). He raised his Gateway rating
from neutral to buy July 30, a week after the company missed its estimate.
Piper Jaffray hasn't participated in any of the companies' public offerings.)
Having his finger on the pulse of the PC industry helped Kumar spot an
upturn in Intel's revenue cycle a month ago, well before the company
reported last week that it expected third-quarter revenue to beat estimates
by 8% to 10% as gross margins improve to 51% from 49%.
While Morgan Stanley's Mark Edelstone is getting well-deserved credit for
calling the Intel upside surprise earlier this month, Kumar was the first one
to stick his neck out and say that Intel's third quarter was going to be a
winner.
That was Aug. 21, when Kumar raised his Intel rating from a buy to a
strong buy, writing that PC original-equipment manufacturers were asking
for more chips. The channel vendors and system aggregators also were
saying that unit demand was very strong, which implied that the upsurge
wasn't just the industry's annual inventory build-up. "It was for true
consumer consumption" reasons, he says.
Based on the extra revenue, Kumar predicted back in June -- when the
Street consensus was 73 cents a share -- that Intel could earn 80 cents a
share in its third quarter based on revenues of $6.4 billion. "The herd
instinct is in place so no one can claim that they were wrong," he explains.
"Guys like me who stick our neck out are either right or we get bashed for
being wrong -- it's a case of no guts, no glory." Kumar, who has a 105
12-month price bounty on Intel, isn't as bullish on Intel competitor
Advanced Micro Devices (AMD:NYSE), rating it a neutral.
Looking ahead, Kumar sees the Gateway YourWare model becoming
more of a reality on the low end for PC makers. Next month, consumer
electronics stores will begin selling a new line of "e-machines" from
Trigem, Korea's largest PC manufacturer, for $549 with a $50 rebate. The
amazing thing is this new PC package -- which Kumar says will offer 80%
of a mainstream PC's features at 25% of the price -- will include a 14-inch
monitor.
"Soon the sub-$500 PC, not just the sub-$1,000 PC, will be a reality," says
Kumar, who believes that PC companies and chip makers that enter at this
level will have to sell their wares virtually at cost. As with the YourWare
program, in which vendors try to find profits from e-commerce transactions
after the purchase, PC manufacturers will need to set up deals with
internet service providers to get a piece of customers' ISP charges down
the line.
That's exactly what Trigem is looking to do with Netcom, a privately held
regional ISP that is in a fierce battle for market share.
"This move will enormously pressure consumer-centric companies such as
Packard Bell," a division of NEC (NIPNY:Nasdaq ADR), warns Kumar in a
report from Monday. "The writing on the wall is onerous for participants in
the PC food chain."
As Kumar's views become more widely disseminated -- thanks to his mass
emails to clients and the media -- many company CEOs are starting to take
note. Gateway CEO Ted Waitt even went out of his way, claims Kumar, to
participate in a Piper Jaffray conference call on the PC direct seller two
weeks ago. "Now it looks as if [Waitt] wants to appease me," says Kumar.
Maybe it's starting to pay for an analyst to tell the truth.
thestreet.com |
