Microsoft Earnings May Fall Short, Salomon Says
As rumors of an earnings warning from Microsoft (MSFT) - Get Report abound, one analyst added fuel to the fire.
Over the last five trading days, the stock has fallen 8% as investors, shaken by technology preannouncements, suspect the world's largest software maker will be the next major company to warn about earnings.
Salomon Smith Barney
analyst Richard Gardner told investors that those fears may be dead-on, with lower demand from large U.S. customers and a slowing Europe forcing the giant to miss consensus revenue and earnings expectations.
In active early morning trading, the stock was off 0.1% to $67.90. (For a closer look at the software sector, check out
Joe Bousquin's
article,
Software Stocks Go 'Round and 'Round, Landing Nowhere.)
Analysts, on average, expect the company to earn 42 cents a share in the June quarter on $6.46 billion in revenue, but Gardner told investors that Microsoft could miss those numbers, citing data points from tech wholesaler
Ingram Micro
(IM)
, server behemoth
Sun Microsystems
(SUNW) - Get Report
and blue-chip
Hewlett-Packard
(HWP)
. In his view, the company is likely to miss, but not by much.
"Any shortfall in second calendar quarter revenue and earnings is likely to be modest -- perhaps several hundred million in revenue and 1 to 2 cents in earnings," he said, adding that a similar shortfall could occur in Microsoft's third quarter.
The reasoning behind Gardner's call was tied to domestic and foreign weakness. At home, the analyst sees weaker IT demand in the second quarter from the already weak first quarter, specifically citing data from Ingram Micro's warning on May 13. Because Ingram is a wide net wholesaler, with more than 200,000 products from 100,000 vendors, Gardner said the company's assertion that late May and June demand was lower than expected was a bad sign for Microsoft.
Abroad, the analyst said that the top and bottom line could take a hit after hearing recent warnings from Sun and H-P, both of which talked up global slowdown as a prime factor for their problems. In a worst-case scenario, fiscally concerned corporate customers could even delay orders for Windows 2000 and Office XP.
He reiterated the buy rating he established in an April 20 upgrade, and kept his price target of $85. Since the analyst went positive, the stock is down 1.4%. He still sees good news ahead, despite the near-term choppiness.
Gardner's view is that Microsoft's diverse new products enable it to keep customers happy and margins high, even when demand is off and margins are being pressured. "This fact makes Microsoft the single best way to play next year's acceleration in corporate upgrade activity," he wrote.
He told investors to use weakness as a buying opportunity. Left unaddressed in the note are lingering questions about whether corporate customers really need the product mix that Microsoft is offering and whether, at 39 times earnings, the stock is still too expensive. As of Friday's close, the stock has rallied close to 60% from the 52-week low of $40.25 set on Dec. 20.