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Computer Hardware Sector Sending Mixed Signals On Earnings

By BridgeNews With titans Apple Computer Inc. and Dell Computer Corp. quashing any hope of satisfying Wall Street this quarter, the big question is how other computer-hardware makers will fare in a climate troubled by slowing sales and the weak euro. "Clearly, when Intel, Dell, Apple, and others deliver earnings or revenue warnings, something must be up," says Bruce Steinberg, chief economist at Merrill Lynch & Co. Recent revenue and earnings warnings from hardware manufacturers include:

  • Apple late last month cut its fourth-quarter revenue forecast and warned that earnings would be 30 to 33 cents a share -- not the 45 cents that Wall Street expected. It cited a worldwide sales slowdown, weaker-than-expected educational sales, and a sluggish start for its new Power Mac G4 Cube.
  • On Oct. 4 Dell estimated third-quarter revenue at 3% below expectations because of weakness in Europe, though it expects to meet earnings estimates because of cheaper parts.
  • These warnings followed an announcement by semiconductor giant Intel Corp. that it would miss its sales target, pulling the Nasdaq down near its May lows.
  • On the New York Stock Exchange, Xerox Corp. warned it would post a third-quarter loss of 15 to 20 cents a share and axed its dividend to 5 cents a share from 20 cents.
  • Silicon Graphics created more jitters with an announcement that it sees a wider-than-expected first-quarter loss of 28 to 30 cents a share. The weak euro has played a role, with the technology sector taking it on the chin with the highest European exposure of any S&P sector, Steinberg says in a recent research report. Yet despite warnings, the broad computer industry doesn't appear to be suffering from slower demand, he says, noting new orders for computers were up more than 30% from a year ago in August. "PC demand still appears strong, albeit not quite as strong as it was," Steinberg says. "And demand for other types of computer equipment, like servers and storage devices, appears extremely strong." Some companies, such as Sun Microsystems Inc., seem immune to negative forces. Sun, which blew Wall Street away with stellar fourth-quarter results, looks poised for a repeat performance, Toni Sacconaghi of Sanford Bernstein said. He expects year-over-year revenue growth of 50%, up from an impressive 42% last quarter. "What you're continuing to see is. . .acceleration in their business," says Sacconaghi, who expects Sun Microsystems to highlight growth in storage products of more than 40%. He also is bullish on IBM Corp., projecting third-quarter earnings at $1.12 a share, 4 cents above the First Call consensus estimate of $1.08. Jimmy Jones of A.G. Edwards & Sons told BridgeNews that lower component prices would help the PC industry, though he wasn't as upbeat as Steinberg. "We have simply gotten too many conflicting signals to stay comfortable with the PC group at this time," saysJones. "One thing we do know is that Apple's announcement is likely to muddy the waters in terms of earnings expectations for an already battered PC sector."
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