Merrill Unpacks Problems for Storage Companies
Merrill Lynch
analyst Tom Kraemer downgraded three of tech's big names today and trimmed his price target on a fourth, citing a slowdown in the storage industry.
He dropped long-term ratings on
Hewlett-Packard
(HWP)
and
Sun Microsystems
(SUNW) - Get Report
to accumulate from buy and sliced his intermediate-term rating on
Network Appliance
(NTAP) - Get Report
to neutral.
Kraemer trimmed the price target of the market-share leader in storage,
EMC
(EMC)
, to $43 from $48 because of slumping gross margins.
In an extensive 116-page report on the storage industry, released yesterday ahead of the downgrades, Kraemer said slowing spending means the earnings stream for storage makers will be unstable and curb their once-lofty growth expectations.
Add in the current trend to move away from server-attached storage and into networked storage, and many companies face a risk to earnings. Kraemer singled out Hewlett-Packard and its computing systems unit as an example.
Kraemer's last comments about H-P sent the stock to a new 52 week-low when he said several weeks ago that
sluggish printer sales could torpedo future profits. With mounting worries about its printing and storage businesses, Kraemer downgraded the stock today. Hewlett-Packard, however, was lately up 1.5% to $26.40. Its 52-week high is $68.09.
Storage stocks took a big hit in late January and have been losing over the last month.
Sun was lately off 2.9% to $14.23. Kraemer said the company faces massive challenges in trying to bolster its storage business. On the server front, the company is in the middle of moving from UltraSparc II chip-based servers to UltraSparc III chip-based servers. Kraemer was upbeat about Sun's ability to make deals with manufacturers, but said "it would be the first of many required steps to establish the product and solutions leadership."
Kraemer estimated that the margins for EMC's Symmetrix storage product will fall from 49% to 42% by 2005, with margins for other products also sliding. EMC was recently off 0.5% to $26.55.